Canada: Foreign Franchisors Expanding Into Canada

Canada continues to be the most important market for US franchisors operating outside of the US. The regulatory regime in Canada aimed specifically at franchising is much less developed and, accordingly, much less restrictive than in the US. Most franchised businesses involve retail restaurants, services, or sale of consumer goods, all of which usually rely heavily on their locations and the real estate related to those locations.

Only Alberta and Ontario have enacted specific franchise legislation. Neither province imposes a registration requirement (a former statute in Alberta requiring franchisor registration has been repealed). Both the Alberta and Ontario statutes are intended to require full disclosure by franchisors to franchisees so that the franchisee can make an informed decision when entering the franchise relationship.

Both the Alberta and Ontario statutes require detailed disclosure documents to be provided to the prospective franchisees. Both statutes protect the right of franchisees to associate without restriction or fear of penalty by franchisors and both provide that franchisors owe franchisees a duty of fairness in their dealings. Both Acts rely on private rights of action to enforce these rights and duties. There is no regulatory authority in place in either province to oversee compliance or to provide guidance or comfort. Each of the Acts provides that if a franchisee suffers a loss because of a misrepresentation contained in disclosure documentation, the franchisee shall have a right of action for damages. Of greater interest to many franchisees, however, is the franchisee’s right to rescind the franchise agreement within specified time limits if proper disclosure is not made.

The Competition Act may affect franchises and franchising practices since the business practices of franchising can often aim at a uniformity of product and price that may be seen as anti-competitive. For example, any sale that discriminates directly or indirectly against competitors of a purchaser by granting any discount, rebate, allowance, price concession or other advantage not similarly granted to other competitors is prohibited. The matter of great concern to many franchisors is the prohibition on price maintenance found in the Competition Act. Any attempt to directly or indirectly attempt to influence upwards or to discourage the reduction of a price at which any person supplies or offers goods or services in Canada is prohibited by the Competition Act. Schemes of referral selling or pyramid sales may run afoul of the Competition Act prohibition aimed at multi-level sales. Trade practices limited by the Competition Act include exclusive dealing, market restrictions, tied selling, refusals to deal and delivered pricing. The Competition Act sets out numerous regulations regarding advertising and deceptive and marketing practices, all of which must be taken into account in creating and implementing appropriate franchise arrangements.

In Canada, as in the US, it is usual for the franchisor to enter into the lease with the owner of the land or shopping centre. This permits the franchisor to control the location, which is usually of prime importance and, through a properly drafted sublease to the franchisee, replace the franchisee with another operator, or operate the location directly, if the franchisee is in default.

Large franchisors with strong covenants will normally be able to require the use of the franchisor’s form of lease or at least successfully amend the landlord’s form which will usually not meet the franchisor’s needs, especially in relation to rights to sublease to franchisees from time to time. Canadian standard form retail leases would normally permit the landlord to terminate the lease should the tenant wish to sublease, and require that any profit or other payment made by the subtenant to the tenant in excess of that called for by the head lease be paid to the landlord. In addition to amendments to those provisions, further amendments to the landlord’s standard form lease required from the franchisor’s perspective include the ability to transfer the franchisor’s interest in the lease to a third party purchaser or on an internal reorganization without the need for landlord consent.

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.