Entering into a franchise can be an exciting and lucrative business opportunity. However, it also involves a complex legal relationship governed by a detailed contract known as a franchise agreement.
In Alberta, where franchising is regulated under provincial legislation, prospective franchisees must take extra care to understand their rights and obligations before signing any documents. By hiring legal counsel, franchisees can help avoid problems in their franchise agreements, such as:
- Leaving unfair terms in the agreement.
- Not complying with provincial and federal regulations.
- Ambiguities in the agreement that could cause issues down the road.
- Not negotiating for better terms when possible.
- Failing to conduct complete due diligence.
What Is a Franchise Agreement?
A franchise agreement is a legally binding document that outlines the relationship between a franchisor and a franchisee. It sets the terms under which the franchisee is granted the right to operate a business using the franchisor’s brand, systems, and support. The agreement typically covers topics such as franchise fees, operational obligations, advertising contributions, territorial rights, and the duration of the relationship.
In Alberta, franchise agreements are subject to the Franchises Act, which mandates certain disclosures and legal protections for franchisees. Understanding this agreement in full is critical, as it governs nearly every aspect of the franchisee’s business operations.
Disclosure Requirements in Alberta
Under the Franchises Act (Alberta), franchisors are required to provide a disclosure document to the prospective franchisee at least 14 days before the franchise agreement is signed or any payment is made. This document must contain all material facts about the franchise, including financial statements, the franchisor’s litigation history, and contact information for existing and former franchisees.
Failure to comply with these disclosure obligations can give the franchisee the right to rescind the agreement within 2 years of signing. Given the high stakes, it is vital that prospective franchisees understand the contents and implications of the disclosure document before proceeding.
The Role of a Lawyer in Reviewing a Franchise Agreement
Legal counsel plays a key role in helping franchisees understand and assess franchise agreements. Here are several important ways in which a lawyer can assist:
Identifying Unfair Terms
A lawyer can review the agreement for terms that may be unusually restrictive or financially burdensome. These may include high royalty fees, mandatory purchases from designated suppliers, or limited renewal rights. Lawyers can also assess the impact of clauses related to exclusivity, non-competition, and territory restrictions.
Ensuring Legal Compliance
An Alberta-based lawyer familiar with the Franchises Act and associated regulations can ensure that the agreement complies with provincial requirements. This includes verifying that the disclosure obligations have been met and that the franchisee’s statutory rights, such as the right to associate, are upheld.
Clarifying Ambiguities
Franchise agreements often contain technical legal language that may not be immediately clear to someone without legal training. Lawyers help translate these terms into understandable language, enabling franchisees to make informed decisions. They can also draft questions for the franchisor to clarify vague or inconsistent provisions.
Negotiating Better Terms
Although many aspects of franchise agreements are standardized, certain terms may be open to negotiation. A lawyer can identify which parts of the agreement may be flexible and advocate for revisions that better protect the franchisee’s interests. This may include negotiating for more favourable termination clauses, reduced initial fees, or expanded operational rights.
Conducting Risk Assessments
A legal advisor can help evaluate the overall risk of entering into the franchise, including financial risks and the franchisor’s business history. This due diligence process may include reviewing the franchisor’s litigation background, previous bankruptcies, and franchisee satisfaction levels.
Common Legal Pitfalls
Many franchisees in Alberta make the mistake of signing agreements without proper legal review. This can lead to long-term financial burdens or operational constraints. Other common pitfalls include:
- Misunderstanding exclusive territory clauses
- Overlooking the importance of the disclosure document
- Committing to long-term contracts with limited exit options
- Failing to understand the franchisor’s operational control
Legal review helps avoid these issues and helps the franchisee enter the relationship with full awareness of their rights and responsibilities.
When to Contact a Lawyer
It is advisable to consult a lawyer as early as possible, preferably before any documents are signed or fees are paid. The best time to engage legal counsel is upon receipt of the disclosure document. Early legal advice allows sufficient time for review, clarification, and potential negotiation.
Start Your Franchise Business the Right Way
Franchise agreements are complex legal documents that carry significant long-term implications. In Alberta, franchisees have legal protections under the Franchises Act, but it is crucial to understand these protections and the specifics of the franchise arrangement before committing. Legal professionals provide essential support by reviewing agreements, clarifying terms, ensuring compliance, and safeguarding the franchisee’s interests. If you are considering entering into a franchise agreement in Alberta, KH | Dunkley Law Group can help. Professional legal advice can provide peace of mind and help you make a confident, informed decision. Book a consultation today and see how we can help you with your franchise agreement.
This memorandum is for informational purposes only, does not constitute legal advice or an opinion, and does not create a solicitor-client relationship. This is an overview and is not intended to be a complete and exhaustive explanation of the concepts covered. This information may become inaccurate based on passage of time or changes in the law. Nothing herein should be relied upon without seeking the advice of a lawyer.
