What to do if your franchisee wants a rescission

Business reasons why franchisees claim rescission

Franchisees tend to walk away from the franchise system when they no longer believe it benefits them. These departures usually come after a mix of financial strain, poor results, lack of support, or territory problems.

When one or more of these factors build up, some franchisees stop trusting the value of the brand.

Here are the most common reasons why franchisees decide to leave:

• High ongoing costs – Franchisees may feel the combined burden of franchise fees, royalties, marketing fund contributions, tech fees, and supply markups. If these costs cut too deeply into their margins, they tend to start questioning why they are paying them, especially if they are not seeing the promised return.
• Low sales or weak profitability – Even if the franchise model worked elsewhere, local conditions can hurt a specific site. Poor foot traffic, changing demographics, or tough competition can all limit revenue. When sales stay low and costs do not drop, confidence fades fast.
• Lack of support from head office – If franchisees do not receive regular help, like staff training, marketing guidance, or clear operational advice, they feel isolated. Many end up feeling like they are running an independent business while still paying fees and following rules they do not benefit from.
• Territory and competition issues – When franchisors open new locations too close to an existing one or allow other franchisees to market in the same area, the original operator may feel pushed out. Overlapping territories and unclear rules governing territory rights often cause disputes that lead to exit attempts.

Each of these reasons on its own can cause frustration. When combined, they push franchisees to consider rescission and seek a clean break from the brand.

Consequences if a franchisee wins a rescission claim

When a franchisee wins a rescission claim, the fallout can spread far beyond that single dispute. These claims can lead to heavy payouts, invite copycat actions, and weaken the system from within.

Here are the main consequences you can face if a franchisee gets a rescission:

• Large payout demands – Franchisees who win a rescission usually ask for full recovery of their investment, including franchise fees, startup costs, and ongoing losses. Claims in Quick Service Restaurant (QSR) systems can easily reach well over $500,000, though some are smaller. In addition, there are legal fees and other costs that a franchisor will be expected to cover.
• Encouragement for others to file – Once one franchisee exits the system with a payout, others take notice. Even franchisees who have not complained before may try to do the same if they think the system will let them leave with cash in hand.
• Loss of control over your system – Multiple claims signal to the market and your network that the system is unstable. Prospective franchisees may walk away, and existing ones may lose trust in your leadership. The damage to your brand’s reputation can outlast any one legal dispute.
• Bankruptcy and network breakdown – If several franchisees leave through rescission, the system may not survive. You could lose large sections of your network, face supply disruptions, and run into territory gaps. If enough claims pile up, legal fees and settlements can lead to bankruptcy.

Even one rescission can hurt your brand, but several at once can break the business entirely. Acting early and decisively is the best way to avoid that risk.

Read how courts have approached the franchisor’s obligations in the Chatime injunction case.

When can a franchisee file a rescission claim?

There are two key requirements needed for a franchisee to bring a rescission claim:

1. The franchisor did not deliver a franchise disclosure document (known as an “FDD”), or delivered an FDD that is significantly deficient, and

1. The franchisee delivered a notice of rescission within two years from the date of signing a franchise agreement.

After that, if the franchisor disputes the claim, the franchisee would need to bring a legal claim in court (or arbitration, if the franchise agreement contains a proper arbitration agreement).

What makes a legally compliant FDD?

A franchisor has delivered a valid FDD if – generally – it is one document, delivered at one time, and if it contains all these fundamental components:

• Franchisor’s certificate (signed as required);

• Full financial statements for the franchisor’s most recent year-end, prepared on at least a review-engagement basis;

• Copies of all agreements the franchisee is required to sign;

• All material facts about the franchisor, the franchise system and the location, and

• All other prescribed information (setup costs, system-wide franchisees lists including terminated franchisees, etc.).

The strength of the rescission claim will be assessed based on these components. If the franchisee has sufficient evidence that the franchisor made a significant disclosure omission or misrepresentation, there can be a legitimate dispute that could result in rescission decision and the awarding of damages to the franchisee.

What is the 2-year limitation period?

If a franchisee does not receive an FDD (or a compliant FDD), the limitation period to deliver a notice of rescission is two years from the date of entering into the franchise agreement. After the limitation period has expired, this remedy is no longer available to the franchisee (the franchisee will potentially have other remedies but likely not the rescission remedy).

The franchisor must respond to the notice of rescission within sixty days. If no agreement is reached by the two sides and depending on the dispute resolution requirements in the franchise agreement, the franchisee can then move ahead with commencing a legal claim for rescission in court or, if so required, in arbitration. This process can potentially involve mediation if required or if the parties choose.

What damages can the franchisee be entitled to?

If a franchisee wins a rescission claim, they may recover costs tied to buying, launching, and operating the franchised business.

If a franchisee wins a rescission, they may claim compensation under three main categories:

• Franchise fees and royalties – These are amounts paid directly to the franchisor. They are usually well-documented and recoverable by the franchisee.
• Equipment and leaseholds – This includes equipment (e.g., POS systems, freezers) and leasehold improvements (e.g., counters, furniture, fixtures, renovations). These costs may be paid to the franchisor or third-party vendors. The franchisee typically needs contracts and receipts to support these claims.
  • If the franchisee keeps operating the business independently after rescission, they may not be entitled to claim the full value of leaseholds and non-proprietary equipment.
  • Inventory on hand may also be claimed.
• Other losses – This is the broadest category and includes:
  • Operating losses
  • Unpaid rent (typically paid to landlords; may be offset by revenue)
  • Unpaid owner salary (reasonable manager wage if the owner was working without pay)

This third category gives you more room to negotiate. If the franchisee was profitable, their claim here may be reduced or denied. All claimed expenses should be supported by source documents (receipts, etc.) if challenged by the franchisor. Without proper documentation, a judge or arbitrator may reduce any award of damages.

If the claim goes to court or arbitration, and depending on the parties’ positions, both sides may need forensic accountants to review the figures and present expert reports on the reasonableness of the costs and losses.

What do you do if your franchisee wants a rescission

You should act quickly when a franchisee signals that they want out through a rescission. Early action helps you contain the damage and steer the process in a more predictable manner.

To stay in control, a franchisor may need to both defend the claim and go on the offensive at the same time – if there are grounds to support a counterclaim. Defend against the claim (if warranted) and consider pursuing your own claim (if warranted), and take action to protect the brand and everything you have built.

You should focus on three objectives:

• Get control of the franchisee’s location (where possible)
• Protect your intellectual property
• Reduce the monetary exposure in what the franchisee is claiming

For broader insight, see Not all complaints by franchisees are legitimate.

Getting your location back

You should evaluate the merits of taking back the franchisee’s location as soon as a rescission comes up. If you control the head lease, you may have the right to take over the site. This puts you back in charge of the location and gives you access to whatever assets are left behind.

When you take back the location, the furniture, equipment, inventory, and other physical items have to be addressed before they become legally yours. These assets can help you re-open the location, transfer it to another operator, or sell them to recover costs but there are steps under the buyout provisions in the franchise agreement or your rights and obligations as secured creditor (if you have security rights to the assets of the location as collateral). If you do not control the lease, you may still be able to negotiate a return or buy back the assets, but it will require more steps, including seeking court orders.

Without access to the location, you give up a lot of leverage. Even if the franchisee leaves, they may strip the space or block your efforts to rebuild in that area. Taking quick action to regain possession (where possible and warranted) can be effective in protecting both your physical assets and your brand’s presence in the local market.

For practical strategies, see Obstacles in terminating a franchisee and taking over location.

Protecting Intellectual Property

Depending on what the franchisee is doing after leaving the system, you may need to take steps to stop the franchisee from using your brand and other confidential tools during or after a rescission claim. Franchisees sometimes try to hold on to accounts, content, or customer data, even though they no longer have the right to use them. This includes logos, marketing materials, social media accounts, software tools, and subscriber lists.

To protect the brand, consider the merits of separating the legal fight over rescission from the misuse of intellectual property. You can handle both at the same time, but there may be a basis to pursuing them on different tracks. For protecting intellectual property, consider the potential for bringing an injunction application to block the misuse in the immediate term.

Injunction applications are legally complex and time-consuming, but they can be effective.

Reducing the damages claimed by the franchisee

You can lower the financial risk by finding ways to reduce the amount that a franchisee claims. Some franchisees ask for small amounts, but others go after hundreds of thousands of dollars.

You should assess the size of the claim early on and decide whether to fight or settle. If the amount is small, say, under $50,000, you may prefer to settle and move on. But for larger claims, you may have to prepare to properly defend the claim. This means gathering records, reviewing your agreements, and making sure your side of the story is clear and well documented.

You will probably need a forensic accounting report that provides analysis of what the franchisee really lost. Courts and arbitrators rely on these reports when deciding losses. If the franchisee’s evidence about financial losses is weak or incomplete, that gives you a chance to push back and reduce the claim.

By staying organized and acting early, you give yourself a better chance of keeping a potential damages award low, keeping your brand strong, and avoiding further claims from other franchisees.

Should you go to court or arbitration?

You should check the franchise agreement to verify whether disputes are required to go to court or arbitration.

Many franchise agreements include an arbitration requirement, but not all of them hold up legal scrutiny. Courts sometimes reject arbitration agreements if, for example, they go against franchise laws in your province or territory.

If your agreement seeks to force the franchisee to arbitrate in another province or country, that may be grounds to strike down the arbitration requirement. For example, a provision that requires arbitration in a specific location can be ruled invalid if the provincial franchise statute in your province requires that disputes be resolved locally. Always review the arbitration clause with a lawyer experienced in this area before assuming it will apply.

Once you know where the dispute will go, you can prepare your response. This will also affect how fast the case moves and how much control you have over the process.

How long does fighting a rescission claim take?

You should expect the process to take at least a year if it goes to arbitration. Arbitration usually moves faster than court because it happens in private and does not involve court delays.

If the dispute ends up in court, the timeline can get much longer. Court cases often take several years to finish. Delays are common, and the process requires more filings, complying with more rules, and going through more procedural steps before a final decision.

The longer the fight drags on, the more it costs. In some situations, it can also keep the franchisee connected to your system, which may create confusion or damage your brand. That is why it helps to resolve these cases early when possible.

Can you use a non-compete restriction against a franchisee?

In the face of a rescission claim, it may be impossible for a franchisor to enforce non-competition restrictions against the franchisee. Rescission means cancellation of the agreement. However, a rescission claim needs to be proven in court. In some circumstances and depending on the strength of the rescission claim, it may be open for a franchisor to argue that until a rescission claim is legally proven in court, the non-competition clause should be enforced.

Common issues with non-competes

You cannot always rely on non-compete restrictions to stop a former franchisee from running a competing business.

Other than issues arising out of rescission claims, some non-compete restrictions are too broad in scope or too vague to stand up to a legal challenge in court. If your non-compete restriction tries to block competition across too wide an area or for too long, it may not withstand legal challenge.

Courts prefer narrow restrictions that commercially make sense based on the nature of the franchise system, the territory and the franchise location. A clause that blocks competition within a few kilometres of the former location is more likely to be enforced. Wider restrictions may be rejected as commercially unreasonable.

But non-compete restrictions do not always protect your brand or assets. Even if the clause fails, your intellectual property is still yours and should be protected regardless. You can act against anyone who uses it without permission, regardless of whether a non-compete applies.

For guidance on enforcing post-termination restrictions, see Are Non-competition restrictions enforceable?.

What happens if the franchisee has stopped paying royalties?

If the franchisee who makes a rescission claim has stopped paying royalties or is otherwise in default of their obligations under the franchise agreement, the franchisor may be able to terminate the franchise agreement, get control of the franchised business, sell it, and use the proceeds from the sale to offset the rescission damages claimed by the franchisee.

Law Works can help you defend against rescission

Rescission claims are high-stake cases that can damage your brand, drain your resources, and weaken your system, which is why it is important to have the right legal team by your side.

At Law Works, we have deep knowledge and many years of expertise in franchise and commercial disputes, including how to handle rescission claims. We advise franchisors across Canada and help them protect their systems, reduce risk, and push back against claims that are overreaching. We are here to help you where possible.

Contact us today for a consultation

For more about proactive legal positioning, read:

Terminating a franchise agreement: A primer
Franchise Rescissions in Ontario: A disclosure document primer

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The information contained in this article is provided for informational purposes only and does not constitute legal advice. Readers should not act on this information without seeking professional legal advice from a lawyer experienced in this area. The content in this article may not reflect the most current legal developments, and the application of law can vary in different provinces and territories. As such, the information in this article is not guaranteed to be complete, correct, or up to date. The author and the publisher of this article disclaim all liability for any actions taken or not taken based on any or all of the contents of this site.

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