Franchising in Canada: planning for the end of the agreement

Turning an existing business into a franchise also means planning for what happens when a relationship ends. An improvised exit can disrupt customers, leave commitments unresolved and undermine trust across the franchise network. Before offering your first agreement, define a clear, proportionate and workable termination process, then have it reviewed by a lawyer.

1. Distinguish between the situations that can end a relationship

Termination brings an agreement to an end before its expiry date. It should not be confused with expiry, non-renewal or transfer to another operator. These situations may have some similar effects, but their requirements and consequences differ.

Start by listing the problems that could jeopardise the relationship: unpaid royalties, abandonment of the premises, unauthorised use of the brand or a serious breach of contractual obligations. This list will help inform the legal drafting; it does not automatically constitute a set of valid grounds for termination.

For each situation, ask three questions:

• Which specific obligation would be breached?
• What evidence would establish the breach?
• Could the breach be remedied, and on what terms?

Avoid treating an administrative delay in the same way as conduct that puts customers in immediate danger. Ask your lawyer to distinguish between breaches that may require notice and time to remedy them, and situations that could justify immediate action. There is no universal period for remedying breaches that applies to all Canadian franchises.

2. Draft clauses in line with the applicable law

Canada has no general federal legislation specifically governing franchising. The relevant legal framework depends, among other things, on the province in which the franchised business operates. The agreement alone therefore does not determine all the parties’ rights.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 imposes, among other requirements, a duty of fair dealing in the performance of the agreement. This duty includes good faith and adherence to reasonable commercial standards. A clause granting a right to terminate does not relieve the franchisor of its obligation to exercise that right in accordance with the applicable law.

The Act also requires pre-contractual disclosure: subject to applicable exemptions, the disclosure document must be provided at least 14 days before a franchise-related agreement is signed or a payment is made. Termination conditions are among the information that must be disclosed. The Ontario government does not approve franchisors or their disclosure documents.

Quebec has no general franchise-specific legislation. The rules of the Civil Code of Québec apply, particularly those concerning contracts, good faith and failure to fulfil obligations. Depending on the circumstances, some clauses may also be assessed under the rules governing contracts of adhesion — agreements whose essential terms are imposed by one party rather than negotiated.

Finally, distinguish contractual termination from statutory remedies for inadequate disclosure. In Ontario, for example, a franchisee may have a right to rescind the agreement within the time limits set by law. Your agreement cannot simply override applicable statutory protections.

3. Establish a procedure your team can follow

A well-drafted clause is not enough if nobody knows how to apply it. Prepare an internal procedure that separates fact-finding, the legal decision and the practical arrangements for the exit.

Appoint someone to manage the case. They should be able to gather the relevant records: the signed agreement, correspondence, payment statements and commitments to remedy breaches. Also record the franchisee’s responses and any steps your team has already taken.

Your procedure should specify:

• who can authorise a formal notice;
• how to check the agreement’s requirements for serving notice;
• who monitors deadlines and assesses whether a breach has been remedied;
• when to consult a lawyer before taking any irreversible decision.

Avoid automatic responses, such as cutting off access to IT systems as soon as a payment is late. This could interrupt trading and raise significant contractual issues. Before suspending a service or access, check your rights, the practical consequences and any obligations that remain in force.

4. Plan the practical consequences of an exit

Work through the closure of a franchise on paper before opening one. Who removes the signage? What happens to outstanding orders, warranties, gift cards and stock? Who responds to customers?

The agreement should address obligations to stop using the brand, return confidential documents and settle outstanding amounts. Do not assume that buying back stock or equipment will be compulsory: define the applicable rights and conditions.

Also plan how to handle digital access and personal information. Customer records do not automatically become the franchisor’s property; any transfer must comply with contractual rights and applicable privacy laws.

Key takeaway: before granting your first franchise, have a termination clause, a decision-making procedure and an exit checklist reviewed by a lawyer. A planned end to an agreement protects customers and the franchise network better than an improvised response.