1201059 Ontario Inc. v Pizza Pizza Ltd., 2013 ONSC 5200, is a recent decision out of Ontario that addresses the disclosure requirements of a franchisor with respect to the obligation of a franchisee to incur substantial costs to renovate a store on renewal of the franchise agreement.
The franchisee claimed that the franchisor did not meet its obligations under the Arthur Wishart Act (Franchise Disclosure), 2000 (the "Act") by failing to disclose details of the franchisor's renovation plans and costs with respect to the Pizza Pizza location operated by the franchisee. The court held that the franchisor did not have an obligation to provide a fresh disclosure document prior to the execution of a franchise renewal agreement because the proposed renovations to the Plaintiff's restaurant did not constitute a "material change" since the date that the original franchise agreement was entered into by the parties.
Section 5(7)(f) of the Act states that the franchisor's obligation to provide written disclosure does not apply to the renewal of a franchise agreement where there has been no interruption in the operation of the business operated by the franchisee under the franchise agreement and there has been no material change since the franchise agreement was entered into. There was no interruption to the operation of the plaintiff's business.
Under section 12 of the Act, the franchisor has the burden of proving the exemption. The Court held that such exemptions are to be narrowly construed. The test for materiality is an objective test and requires determination of whether an action or change by the franchisor would affect a reasonable investor's decision to acquire the franchise. In its decision, the Court determined that there were no material changes in the wording in the renewal agreement that were fundamental to the franchisee's business operations. In addition, the Court determined that the franchisee had been fully informed, before signing the original franchise agreement in 1996, that all Pizza Pizza locations, including the one the franchisee would be purchasing, would have to undergo renovations to transform them into sit-down restaurants and that the franchisee would be responsible for the renovation costs. As a result, the Court determined that even if the renovations had been a material change, the change was not one that took place after the date of the initial franchise agreement.
In addition, the Court determined that the franchisor acted in good faith throughout its dealings with the franchisee, giving the franchisee multiple options and alternatives when the franchisee was dissatisfied with the renovation requirement.
This decision suggests that where there are no material changes from the original franchise agreement, a franchisor is not obligated to provide disclosure upon granting a franchisee the right to renew. In this decision, the franchisor was able to successfully rely on an exemption found in section 5(7) of the Act. However, franchisors should be cautious when seeking to rely on disclosure exemptions. When in doubt, they ought to err on the side of caution and provide a franchise disclosure document notwithstanding the possible availability of an exemption from disclosure.
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