Franchising in Canada: check the renewal terms

Buying a franchise means joining a network for a fixed period, not necessarily for your entire working life. Before choosing a brand, check what will happen when the agreement expires. A profitable outlet can lose some of its value if its operator cannot continue trading under the brand. Here is how to assess the renewal terms before you commit.

1. Distinguish a right to renew from a mere possibility

Describing an agreement as ‘renewable’ is not enough. You need to establish whether the franchisor commits to renewing it when specific conditions are met, or retains the discretion to accept or refuse your request.

Ask your lawyer to identify the following:

• the initial term of the agreement and the length of each additional term;
• the number of renewals available;
• the conditions you will need to meet;
• the grounds on which the franchisor may refuse renewal;
• the deadlines and required method for giving notice.

An option to renew does not necessarily mean an extension on the same terms. The agreement may require you to sign the version offered to new franchisees at that time. Royalties, operating obligations or technology fees could therefore change.

Ask the franchisor how recent renewals have been handled. The answers will help you understand its practices, but are no substitute for a written commitment. If a promise influences your decision to buy, ask for it to be included in the appropriate contractual documents.

2. Check whether the conditions will genuinely be within your control

Some requirements depend mainly on you: giving notice on time, completing training or paying outstanding sums. Others are less certain, particularly where renewal depends on the franchisor’s satisfaction or on broadly defined compliance requirements.

Pay particular attention to clauses dealing with breaches. Does the agreement require you to be free of any breach at the time of renewal, or to have committed no breaches throughout the entire term? Could an old issue, resolved long ago, be used as grounds for refusal? Is there a period in which you can remedy a breach before renewal is refused?

Next, draw up a timetable working backwards from the expiry date. Record the earliest date on which you can request renewal, the deadline and the documents you must provide. Make sure you have a way to retain proof of receipt.

Also speak to several franchisees who have already renewed:

• When did they receive the new terms?
• Did they have to carry out refurbishment work or complete further training?
• What disagreements delayed the process?
• Did the requirements outlined at the outset match the final requirements?

These conversations help you assess how predictable the process is; they do not guarantee that your own renewal will follow the same course.

3. Calculate the cost of renewal and its impact on value

The renewal fee may be only part of the cost. Ask for a written list of other potential obligations: refurbishment, equipment replacement, new signage, IT migration, training and fees for preparing the documents.

Distinguish amounts that are already fixed from those to be determined later. For unknown costs, find out how they will be calculated, how much notice you will receive and whether there is a contractual cap. A commercial estimate does not offer the same protection as a limit written into the agreement.

With your accountant, compare two scenarios: continuing after renewal or ceasing to use the brand when the agreement expires. The aim is to assess whether you can reasonably recoup the required investment over the new term, without assuming that you will renew again.

Consider a potential resale too. A buyer will want to know how much time remains on the agreement and the conditions for continuing the business. Do not assume that a transfer automatically starts a fresh contractual term. Check whether the buyer takes over only the remaining term or must enter into a new agreement, and how this would affect the appeal of your business.

4. Have the applicable provincial protections checked

Canada has no general federal franchise law. Franchise-specific rules are set at provincial level and must be checked according to where the business will operate.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 imposes a duty of fair dealing in the performance of the agreement, including its renewal. This duty includes good faith and compliance with reasonable commercial standards. It does not, however, create an automatic right to a new agreement.

In provinces that require pre-contractual disclosure, a renewal may qualify for an exemption under certain conditions. Do not assume that the exemption applies: significant changes or the circumstances of the transaction may call for legal analysis and fresh disclosure.

In Quebec, there is no franchise-specific legislation imposing a comparable general disclosure regime. The Civil Code of Québec governs matters including contracts, good faith and abuse of rights. Here too, good faith alone does not guarantee renewal.

Have any release or waiver required as part of the renewal reviewed: certain statutory rights cannot be excluded by contract.

Key takeaway: before buying, obtain documented answers to three questions: who decides whether renewal goes ahead, what conditions must you meet, and what financial commitment could be required?