Canada: Can Your Right Of First Refusal Be Easily Circumvented?

Last Updated: July 4 2018
Article by Jean H. Gagnon

Nearly all franchising agreements contain a right of first refusal stipulated in favour of the franchisor in the event the franchisee would like to sell its franchised business.

Such a right of first refusal plays a significant role in maintaining the integrity of any franchise system. It is therefore an important tool, enabling the franchisor to avoid being compelled to welcome within its network a new franchisee that it finds unsuitable. It can also prevent a competing network from attempting, through attractive offers, to purchase establishments of the franchise network, in order to bring them into its own network.

To ensure enforcement of the right of first refusal granted to the franchisor, some franchising agreements also provide for penalties in the event where this right is breached.

However, pursuant to Article 1623 of the Civil Code of Québec, the amount of a penalty stipulated in a contract can always be reduced (but not increased) by a Court. Furthermore, with the passage of time or owing to changes in the market, it may well turn out that a penalty that was intended to be a deterrent will become so insignificant as to amount to nothing more than a user charge that a purchaser with ill intent will be willing to pay in order to circumvent a right of first refusal.

The past few years, however, have taught us that several right of first refusal clauses only offer the illusion of protection and can easily be bypassed in many manners.

For instance, if the franchisee's business is operated from leased premises, a potential buyer could purchase the building in which the business is operated before making an offer to purchase the business. If the lease is nearly up, the owner of the right of first refusal may find itself facing the following dilemma:

  • not exercising its right of first refusal, or
  • exercising its right, knowing that it will have to quickly move the purchased business while a competing business will very likely settle into its current premises.

I have also witnessed situations where the consideration offered was property (for example, a work of art or a building) which the third-party purchaser owned but that the holder of the right of first refusal obviously did not.

I have also encountered other situations where all or nearly all of the consideration offered was payable by way of a promissory note payable on demand. In such a scenario, if the franchisor exercises its right of first refusal, payment of the amount of the promissory note is demanded forthwith upon completion of the sale. However, if the franchisor does not exercise its right of first refusal, payment of the amount of the promissory note is requested much later and maybe even never!

Finally, it is important to know that, pursuant to Article 1397 of the Civil Code of Québec, a sale made in breach of a right of first refusal is nevertheless valid and can be set up against the owner of such a right (the franchisor), subject only to the latter's right to claim damages (or, if the contract contains a penalty clause, to claim the agreed-upon penalty). Hence, once a sale has been made in breach of its right of first refusal, the franchisor will not be able to seek the cancellation thereof. There are, however, some exceptions to this principle.

Therefore, the drafting of a clause granting a right of first refusal must be entrusted to an expert in these types of agreements if the franchisor truly wishes to provide for strong protection that cannot easily be circumvented.

If the clause is not exhaustive and very well drafted, the franchisor may come to the realization, only too late, that, if the potential purchaser has found a way around the exercise of the franchisor's right of first refusal or a way of rendering it inoperative or too cumbersome to exercise, its right of first refusal does not afford the necessary protection.

Three practical tips

Owning the property or holding the head lease of the premises in which the franchisee carries on business

One of the best ways of ensuring that a competing business will not potentially be able to settle into the premises from which the franchisees' businesses are run is for the franchisor to hold, as owner or head lessee, the right to occupy the premises that it will then rent out or sublease to its franchisee.

It is also one of the best ways of ensuring compliance with a right of first refusal clause.

Where the franchisor does not wish to be the owner or head lessee of the premises, it can also enter into a three-way agreement with the lessor and the franchisee, which agreement provides that the franchisor is entitled to an automatic transfer of the lease in the event of termination of the franchise agreement and to a right to approve any new lessee or sub-lessee.

Securing and publishing a movable hypothec encumbering the assets or your franchisees

Another way of guaranteeing better compliance with your right of first refusal is to secure and publish a movable hypothec encumbering your franchisees' assets.

Once again, if the agreement or the clause providing for such a hypothec is properly drafted, it will represent a major obstacle hindering any person wishing to impinge on, or to circumvent, your right of first refusal.

In addition, it is important that this hypothec clearly stipulates that it is guaranteeing compliance by the franchisee with the franchisor's right of first refusal (as well as compliance with the other non-financial obligations of the franchisee), and not just compliance with the franchisee's financial obligations.

Clearly stipulating in your right of first refusal clause that you are entitled to assign it

Many franchisors are hesitant to stipulate a right of first refusal clause in their agreements on the grounds that they do not wish to be required to acquire businesses in their network or because they do not have the financial means to effect such acquisitions.

In order to safeguard the integrity of their franchise system, it is nevertheless often to their advantage to stipulate such a right of first refusal clause anyway and to specify that they have the right to assign it to any person of their choosing.

Armed with such an assignment right, should a franchisee forward to the franchisor an offer to purchase that triggers the exercise of the latter's right of first refusal, the franchisor will be in a position to embark on a search for a purchaser already within its network, or who wishes to become a franchisee, and thereafter assign the right of first refusal to such person. As a result, the business will ultimately be sold to the person the franchisor has selected rather than to an offeror-purchaser whom it does not know or, worse yet, who wishes to join another network.

As far as rights of first refusal are concerned (as in many other fields), "An ounce of prevention is worth a pound of cure".

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
Related Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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