The Covid-19 / Coronavirus pandemic has disrupted social and economic life globally and here in Ontario. It is apparent that the Covid-19 pandemic, resulting closures and physical distancing measures implemented by various governments will have a considerable impact on investment decisions in the franchise context. In this blog we consider the impact of the Covid-19 pandemic on current and shortly anticipated franchise disclosure obligations.
The Crucial Role Of Franchise Disclosure
The franchise disclosure obligations which arise during a franchise purchase or franchise renewal process are critical for both franchisees and franchisors. It provides crucial information to a franchisee so that they can make a fully informed investment decision, and sets the groundwork and expectations on behalf of the franchisor to ensure the relationship is off to a good start and lasts to the mutual benefit of both parties.
Updating Franchise Disclosure With Covid-19 / Coronavirus Impact Considerations
Franchisors who are required to provide disclosure during the Covid-19 pandemic should update such disclosure to include known and reasonably foreseeable impacts of the Covid-19 / Coronavirus pandemic.
Franchisors should consider including the following: a Statement of Impact; a consideration of the effect the Covid-19 pandemic has on the costs of establishing the franchise location; any anticipated impact regarding supply-chain disruptions; updated and enhanced hygiene and sanitation protocols; impact to business hours or hours of operation; and in the case of food franchises impacts on the business model (dine-in to pick-up and delivery only); the impact on the landlord-tenant relationship and rents; workforce reduction measures; any impact on earnings projections and on renovation and construction timelines, to name a few.
The Benefits Of Enhanced Disclosure
In enhancing disclosure to include Covid-19 Pandemic impacts franchisors can mitigate the heightened practical risks around potential rescission claims by franchisees during this time. Cooperation, understanding and support between the two parties is imperative during these difficult times. Consideration should be given where franchisors can assist with debt deferral or forgiveness, tenancy negotiations or support, and temporary waivers of royalties, as collapse of a franchisee location can have reputation harm and risk systemic collapse and market share for franchisors.
Both parties should consider negotiations that may be necessary in amending the franchise agreement to the extent necessary to ensure continued operations of the franchise location. By example, franchisors may consider deferring renovation obligations.
Heightened Risks of Rescission Due To Covid-19 Impacts
If a franchisee is considering delivering a notice of rescission, there should be no comfort in the possibility that the time period for same is suspended. Franchisees should operate under the assumption that the time limits remain the same pursuant to the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3. regardless of any Covid-19 pandemic related disruptions to business. A careful review of the franchise disclosure documents and agreement should be conducted if within the two year period to see whether there may be clauses that are supportive of delivery of such a notice under the current circumstances of the Covid-19 pandemic and related business disruption. Consult legal professionals who can guide you through the decision and assist in navigating through any negotiations.
Whether you are a franchisee or a franchisor, the Covid-19 pandemic has created an unprecedented situation. It is important to seek legal advice to navigate through difficulties and negotiations during these difficult, delicate and uncertain times. Lawyers may be able to assist the parties in negotiating and drafting potentially mutually agreeable solutions, or seek legal recourse for defaults under the agreement or pursuant to disclosure obligations.
Do you need assistance and guidance with your franchise obligations or disputes due to the Covid-19 Pandemic? The lawyers at Gilbertson Davis LLP have experience assisting franchisees and franchisors with franchise disputes. Contact us to see if we can help.