Canada: Practical Considerations For Dealing With Financially Troubled Canadian Franchisees

At some point or another, most franchisors operating in Canada will have to deal with a franchisee in financial difficulty. This article sets out a non-exhaustive checklist of questions and considerations that will assist the franchisor in formulating the appropriate strategy to address this challenge.

1. Assessing the situation

The first step in addressing the problem is a preliminary assessment of the situation. As part of this analysis, the franchisor should first identify the macro-level problems requiring resolution. These problems can include the failure of the franchisee to pay franchise fees, a "dark" (i.e. abandoned) franchise location, and even bankruptcy or creditor-initiated proceedings against the franchisee.

In examining the situation, the franchisor should also reflect on the franchisor's longer-term objectives with respect to the franchisee and the location. The franchisor may consider the degree to which its patience has been strained, and management attention distracted, by repeated defaults and difficulties with respect to the franchisee.

2. Preparation

If it appears that the franchisor will need to pursue a form of remedy against the franchisee, it is necessary to ensure that all potential courses of action are analyzed and that the proper groundwork is set. Proper preparation will include a review of the relevant documentation, as well as a clear understanding of the repercussions of certain decisions and the impact of applicable insolvency laws and procedures on the rights and remedies of both the franchisor and the franchisee. A franchisor should always consider obtaining legal advice at this stage.

The following considerations are integral to the preparation process:

A. Agreements and Contractual Rights

  1. Agreements. Before instituting any action, the franchisor should verify that all documentation is in order and properly signed by the current franchisee. Even if the franchise agreement was properly signed, the franchisor should double check whether the agreement has expired, as that may have consequences on the proposed course of action. A review of the franchise agreement is also important because the agreement may provide for certain remedies available to the franchisor.
  2. Franchise Disclosure Law Compliance. Just as importantly, the franchisor needs to determine if any actions it plans to take will be met with a franchisee's claim relating to non-compliance with any of the provincial franchise disclosure laws. If the franchisor failed to properly deliver a franchise disclosure document, then the franchisee may have a 2 year absolute right of rescission from the date the agreement was signed, in which case the franchisee's claim would often far exceed any amount owing by the franchisee. Any franchisor pursuing a defaulting franchisee should be certain they are on solid ground before taking enforcement steps.
  3. Leases. The franchisor should also review and consider their rights under any lease agreements with the franchisee. If the franchisor sub-leases to the franchisee, the franchisor should be able to control the lease. However, in a sub-lease situation, the franchisor will remain liable to the head landlord for any arrears in rent, and for continued payment of rent for the term of the lease. If there is not a sub-lease situation, the franchisor should examine whether there exists an option to assume the main lease upon termination of franchise, or whether there is a right of entry or other property rights under the franchise agreement.
  4. Security Interests. The franchisor should also consider whether it has a security interest that could be enforced against the business and assets of the franchisee as a secured creditor. Before enforcement is possible, the franchisor will need to determine what obligations the security interest secures and whether those obligations have in fact been breached. To avoid other secured creditors gaining priority, the franchisor should ensure that a financing statement been registered in the proper location at the earliest possible time.

B. Defaults

  1. Defaults. The franchisor should carefully consider the nature of the franchisee's default, as this will dictate the nature and timing of the remedies that are available to it. Events of default and the remedies available are primarily set out in the franchise agreement, although other agreements, such as leases, will include similar provisions. After identifying the default, the franchisor will need to consider whether the default is material or merely technical. Generally, a technical default will not likely allow for the same remedies as a material default; however, this determination will require a review of the terms of the franchise agreement. Finally, the franchisor should consider what operational fixes may be available. If the default can realistically be cured, the franchisee may have a contractual right to do so within a specific period of time. Where the default is cured, it is important for the franchisor to identify and address the cause of the default so that it will not be repeated.
  2. Notices. As a pre-condition to enforcement, the franchise agreement may prescribe that notices of default be issued in a specific form and according to specific timelines. It is integral that any technical notice requirements are followed to ensure the notice is valid.
  3. Course of Conduct. The franchisor should also examine its own course of conduct to determine if it has waived defaults, either expressly or by conduct. For example, a franchisor may inadvertently waive default by repeatedly failing to demand timely payment of fees.

C. Other Stakeholders

  1. Enforceability and Priority. As discussed above, the franchisor should determine whether it has a security interest. If such a security interest exists, the franchisor should further determine if it will be enforceable against third parties. Some legal analysis may be required to determine if the franchisor's security interest is in first secured position or if other deemed or registered interests take priority.
  2. Franchisee's Bank. The franchisor should be aware of any interest held by the bank. In the event that the franchisor has given the bank a comfort letter, the franchisor should review this letter to determine its contents and what obligations it imposes. The franchisor may also consider if there is a long-term business objective (i.e. expanding with a particular lending institution providing financing for all franchisees) that trumps a particular termination/enforcement situation?
  3. Landlord. The franchisor should make inquiries to determine if the rent is current, particularly where the franchisor could become liable for arrears. It will be valuable for the franchisor to have awareness of the legal rights of the landlord and also whether the landlord is cooperative.
  4. Employees, Taxes, and Suppliers. The franchisor should determine whether the franchisee has outstanding tax liabilities or liabilities to employees and suppliers. A full understanding of the franchisee's debts always places the franchisor in a better position to pursue the appropriate remedy.
  5. Guarantors. Finally, a franchisor should consider if there are any guarantors, and if so, the nature and extent of their involvement. Where a corporate franchisee lacks the assets to satisfy its obligations, guarantors become increasingly important.

D. What Laws Apply

Before any legal proceeding is commenced, the franchisor must be aware what franchise, competition, debtor/creditor, tax, insolvency, or other laws apply to the situation. The applicable law is generally set out in the franchise agreement, but jurisdictional clauses have sometimes been ousted by the court. The application of these laws may provide some surprising results, as different jurisdictions may have their own particular foibles. A further consideration is whether an agreement calls for mandatory arbitration or mediation of disputes. Such a clause may limit the franchisor's recourse by preventing a court action.

If the matter involves a franchisee bankruptcy, the franchisor should be aware of the potential reversal of certain interests in bankruptcy, and be alert to the possibility that the franchisee's trustee in bankruptcy might seek to assign the franchisee's rights without the consent of the franchisor.

Any legal analysis should take into account the historical relationship between franchisor and franchisee, as the franchisor must consider, anticipate, prepare for and be ready to rebut any defences raised by the franchisee (meritorious or otherwise). One should examine whether the franchisee has been cooperative or whether the relationship has been troubled, as any past complaints are likely to surface again.

E. Strategic Objectives and Ramifications

Outside of the legal considerations, a franchisor must decide whether it wishes to fix the problems, or simply terminate the relationship. A forbearance agreement may be appropriate if the parties wish to work together as this will allow the franchisor to continue to pursue its remedies if the problem is not rectified.

Even in situations where a default is been cured and legal action is avoided, there may be lingering issues. The franchisor should consider whether the franchisee has a complaint that has not been properly addressed, and if so, how it can be fixed. In certain cases, mediation may be appropriate, or even mandated. If a resolution will eventually require an in-depth exploration of both sides of a course of conduct or series of issues, it is often best to tackle the issue earlier, rather than later when it reappears.

Where it appears that the relationship is unsalvageable and termination is necessary, the franchisor must decide whether it wishes, or may even be obligated, to keep the premises. Other considerations come into play, such as the impact on other stakeholders, including other franchisees. The potential public relations impact should also be assessed.

Finally, the franchisor will need to address the intellectual property issues that arise from the termination of a franchise, including the use of signage, trademarks, licensed products and proprietary methods.

The above considerations are by no means exhaustive. Each franchisee situation is unique and legal advice is necessary to deal with specific situations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions