Buying a Franchise in Canada: Planning for Mandatory Refurbishments

An outlet may look ready to trade yet soon need costly work. In franchising, changes to the concept can mean new décor, replacement equipment or a complete refit. Before buying, assess your exposure to these costs: the opening budget alone does not capture the investment you may be required to make over the term of the agreement.

1. Identify the power to require work

Look for clauses in the agreement covering modernisation, branding, equipment and compliance with network standards. The obligation to refurbish may not appear under an obvious heading: it may arise from a general commitment to maintain the premises to standards that the franchisor can change.

Distinguish between three categories: routine maintenance, replacement of worn-out equipment and alterations required to update the concept. Each has a different timetable and carries a different financial risk.

Questions to ask include:

• Who can require the work, and on what grounds?
• Is there a limit on how often major refurbishments can be required, or a period during which none can be imposed?
• Does the agreement cap expenditure, or does it simply require compliance?
• How much notice will you receive, and who approves the plans?
• Can you be required to close temporarily?

Ask for clarification of phrases such as “as required” or “in accordance with current standards”. The absence of a stated amount in the agreement does not mean there is no financial obligation. Your lawyer should establish the extent of the powers granted by the contractual documents.

2. Establish the outlet’s actual condition

For an existing franchise, obtain the date of the last refurbishment, any available invoices and the franchisor’s inspection reports. Also ask whether there are any notices of non-compliance, deferred works or announced modernisation programmes.

Do not confuse an outlet currently authorised to trade with one exempt from future work. A purchase may come with a requirement to upgrade the premises. You therefore need to understand the conditions that apply to your particular purchase, not just those that applied to the seller.

For new premises, ask which version of the concept will be installed. A new fit-out can quickly become outdated if a new visual identity is already planned.

Then have a suitably qualified professional inspect the relevant technical elements: electrical systems, ventilation, plumbing, equipment and accessibility. The aim is to distinguish cosmetic changes from work involving more substantial alterations. Simply replacing equipment may, for example, require changes to the building’s services.

3. Use disclosure to check investment requirements

In Canada, the rules governing franchises depend in part on the province. Do not assume that a brand’s sales information pack automatically meets local legal disclosure requirements.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 requires, subject to specified exceptions, a disclosure document to be provided at least 14 days before signing a franchise-related agreement or making a relevant payment. Among other things, this document must set out the costs, proposed agreements and material facts required by law.

A known refurbishment plan may be relevant to this disclosure, depending on the circumstances. Ask your lawyer to compare the agreement’s refurbishment obligations with the financial information and plans disclosed. An estimated budget is not necessarily a contractual cap.

Quebec has no franchise-specific legislation imposing the same disclosure regime. The general provisions of the Civil Code of Québec apply, including rules on good faith. Nevertheless, request refurbishment information in writing: the absence of a regime identical to Ontario’s does not make these checks any less necessary.

4. Calculate the impact and negotiate limits

Assess the full cost: design, building work, equipment, installation, any storage required and bringing the outlet back into operation. Add the impact of interrupted trading, including expenses that continue during closure. Have your accountant review the assumptions and obtain quotations once the scope of work is sufficiently clear.

Prepare a scenario in which the work is required earlier than expected. Could you finance it without jeopardising day-to-day operations? Do not assume that a lender will automatically fund a mandatory refurbishment.

Depending on the scope for negotiation, ask for a minimum notice period, a phased timetable, a protected period after opening or a clearly defined limit on major alterations. Clarify any exceptions, particularly for urgent work or work required by law.

Key takeaway: before signing, bring together a description of the possible work, its timetable, a comprehensive cost estimate and the applicable contractual limits. A refurbishment whose scope is still unknown should remain a risk to assess, not an expense assumed to be zero.