Pre-entry disclosure and cooling off
Your disclosure obligations will vary depending on whether you are proposing to enter into a franchise agreement, or renew or extend an agreement.
Under the Code, you must provide an information statement to a party who proposes to enter into a franchise agreement. You are also required to provide a disclosure document, franchise agreement and a copy of the Code to a party at least 14 days before they:
- enter into a franchise agreement (or an agreement to enter into a franchise agreement)
- pay any non-refundable money or other valuable consideration to you or an associate in connection with the franchise agreement
- renew or extend their agreement.
Example: A franchisor and prospective franchisee discuss entering into a franchise agreement. To cover the costs of setting up the franchised business, the franchisor asks the prospective franchisee to cover certain upfront costs, including legal fees and design fees. The prospective franchisee pays the fees. At this stage, despite lengthy discussions about the franchise opportunity, the franchisor has not provided the prospective franchisee with the disclosure document or the franchise agreement.
The prospective franchisee subsequently decides not to proceed with the agreement.
The franchisor must refund all of the money paid by the prospective franchisee as payments made prior to receiving the pre-disclosure documents must be refundable.
The obligation to provide disclosure exists between a franchisor and its prospective or existing franchisees (including a master franchisor in its dealings with sub-franchisors). A master franchisor is not required to comply with these obligations in relation to a sub-franchisee unless the master franchisor is a party to the sub-franchise agreement.