How does a franchisor disclose a “Material Change” to a prospective franchisee?

Although the law doesn’t impose an actual format for the form of the statement of material change, both franchisors and prospective franchisees should keep in mind the Ontario requirement that disclosure must be “clear and concise”. That’s why a statement of material change should either be formatted in the same manner as the disclosure document it modifies, or else it should contain a cross-reference table which points out where the information that is being amended may be found in the disclosure document. The idea is that a prospective franchisee should be able to easily understand the effect of the “material change” to the franchisor’s disclosure document.

Since every person who signs the statement of material change may be sued for any misrepresentation that may exist in the document, by necessary implication a statement of material change must have some sort of “Certificate of Disclosure” that is similar to that found at the back of a disclosure document. Since the law doesn’t specify a format for this certificate, a franchisor’s safest bet is to adapt the form of certificate prescribed for its disclosure document. From the perspective of the prospective franchisee, the statement of material change should include some form of “Certificate of Disclosure”.

How does a franchisor deliver its Statement of Material Change to a prospective franchisee?

To add to all of the confusion, the law does not specify an actual delivery method for a statement of material change by the franchisor to a prospective franchisee. Despite the lack of any guidance from the legislators, a good way to proceed would be for a franchisor to use one of the delivery methods available for the delivery of a disclosure document.

Although the law mandates a 14-day “cooling-off” period following the delivery of a disclosure document before the prospective franchisee makes any payment or signs any agreement relating to the franchise, there is no obligation to provide for any “cooling-off period” following the delivery of a statement of material change. So, what does a franchisor and prospective franchisee do? Obviously some sort of “cooling-off” period would be appropriate, but of course there is nothing sacred about 14 days. If a franchisor can wait 14 days then that would be preferable, otherwise a franchisor should simply wait long enough for a reasonable person (the prospective franchisee) to absorb the new or modified information presented in the statement of material change and to consider its effect on the intended purchase.

What about negotiated changes?

There is no purpose for the franchisor to disclose to a prospective franchisee the very changes which the prospective franchisee may have negotiated. The purpose of disclosure is to require a franchisor to provide a prospective franchisee with material information which they might not otherwise know, and not to waste a franchisor’s time and money on pointless exercises. Therefore, we don’t believe it is necessary for a franchisor to disclose negotiated changes requested by the prospective franchisee. Of course, if franchisees regularly succeed in negotiating changes to a franchisor’s standard form agreements, that fact is definitely material and should be disclosed…. but that’s a topic for another day.