Recent Ruling Challenges Longstanding Franchise Location Practice
As reported by Mondaq (www.mondaq.com), a recent Ontario Superior Court of Justice ruling may have a significant impact on the practice of franchise location selection after an agreement has been signed.
Currently, many franchisors grant a franchise before the actual location is decided. Disclosures do include real estate lease and development cost ranges, but these are only estimates. After the disclosure has been made and the franchisee signs the agreement, both parties work together to find a location they're both satisfied with. This is generally done for business reasons, as the franchisor doesn't want to end up stuck in a lease for a location after a franchisee backs out. If a location that is acceptable to the franchisor and franchisee isn't found within a specific amount of time, the franchisee is usually entitled to opt out of the deal under the terms of the signed agreement.
The recent Ontario court decision questions this very
practice. In this case, a franchisee sued a franchisor for the cancellation of
their franchise agreement, and the basis of their argument was the franchise
disclosure they received. The franchisees argued the disclosure was insufficient
because it didn't include adequate estimates of the location development costs
or a copy of the primary lease, the latter being impossible because a location
hadn't been chosen when the disclosure was delivered. Although it was disclosed
that the franchise location was to be determined after signing in the agreement
itself, the court ruled in favor of the plaintiff's claim for cancellation
based on those reasons. The franchisor in this case is appealing the ruling,
but for now, franchisors may need to exercise caution when signing agreements
without pre-selecting locations.
Location, location, location
A phrase made famous by real estate agents everywhere, location is just as important in a franchise as it is in the world of property. For a franchisee, the right location can make or break a business, so those looking for a franchise do need to take site selection just as seriously as every other step in the process. An ideal location will have access and proximity to the brand's primary demographic and local traffic and not be drowned out by other locations from the same brand.
It's too early to tell what impact the Ontario court ruling will have on location selection, but it does have the potential to change the game for franchisors and franchisees alike if it's not overturned.