Franchising in Canada: understanding security interests over your assets

Buying a franchise can involve more than a franchise agreement and a loan. The documents you are asked to sign may include a security agreement giving a creditor rights over your business assets. Before joining a franchise network, understanding this commitment will help you establish which assets are at risk, which debts they secure and what the practical consequences could be.

1. Identify security interests across all documents

A security interest secures an obligation, usually the repayment of a debt. Depending on the documents and the applicable law, it may allow a creditor to take enforcement action against certain assets if the business fails to meet its obligations. It should not be confused with a personal guarantee, under which an individual agrees to answer for another debtor’s obligations.

Do not look only at the franchise agreement. A security agreement may accompany bank financing, credit provided by the franchisor or an equipment purchase. Documents may also use terms such as ‘general security agreement’ or, in Quebec, ‘movable hypothec’.

Ask your lawyer to prepare a table setting out, for each commitment:

• the creditor benefiting from the security and the business granting it;
• the obligations secured;
• the assets covered;
• the events that allow enforcement action;
• the conditions for releasing the assets from the security.

Reviewing the documents together helps you avoid treating each signature as a separate formality.

2. Define which assets and debts are covered

A security interest may cover a specific machine or a much wider pool of assets: equipment, stock, trade receivables and other existing or future assets. Its precise scope depends on the wording of the agreement and the applicable provincial rules.

Ask for an explanation of clauses covering ‘all obligations’ or assets acquired later. The security could cover more than the amount initially advanced, including certain future amounts, interest or contractual charges. Do not assume that its scope automatically narrows as you repay a loan.

Ask practical questions: will you be able to replace equipment, sell a vehicle you no longer need or assign receivables without consent? Does the agreement allow stock to be sold in the ordinary course of business? Will newly acquired assets become subject to the security?

The aim is to preserve your ability to run the business, not simply to understand what happens if you default. If routine transactions require consent, ask how to obtain it and how long this will take. Also clarify any maintenance and insurance obligations relating to the assets used as security.

3. Check priority and provincial rules

Several creditors may claim rights over the same assets. A bank may require general security, while an equipment finance provider or the franchisor also seeks protection. Their priority cannot be determined simply by the order in which agreements were signed: it depends, among other things, on the legal framework, registrations and any special rules that apply.

In Canada’s common law provinces, provincial personal property security legislation governs these arrangements. In Quebec, movable hypothecs are governed by the Civil Code of Québec and are generally registered in the Register of Personal and Movable Real Rights. A search of the relevant register helps identify registered rights, but does not replace legal analysis.

Franchise disclosure rules apply alongside this framework. In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 requires, subject to statutory exceptions, a disclosure document to be provided at least 14 days before a prospective franchisee signs an agreement relating to the franchise or makes a payment. Draft agreements to be signed in connection with the franchise must form part of the required disclosure.

Quebec has no specific franchise legislation establishing a general pre-contractual disclosure regime; the general rules of the Civil Code, including good faith, apply. Whatever the province, ask for security agreements early enough to have them reviewed.

4. Plan for the release of assets before signing

Repaying a debt does not always mean that every step needed to discharge a registration has been completed. Clarify who will provide the release, who will handle the formalities, who will pay the costs and which obligations must first be settled.

If several creditors are involved, your lawyer can assess whether a priority or subordination agreement is needed. Resolve these questions before making incompatible commitments to different lenders.

Finally, ask which defaults trigger enforcement rights and whether a breach of another agreement can also constitute a default. Notice requirements, time limits and remedies depend on the contract and the law: seizure should never be presented as automatically available as soon as the first payment is late.

Key takeaway: before signing, obtain a clear picture of the assets subject to security, the debts secured and the conditions for release. Have this checked alongside your franchise and financing documents.