You can read our submission here.

In brief, we are proposing a private right of action to courts for abuse of dominance. This has already worked in the US and the EU. It’s being used in the UK, Australia, New Zealand, South Korea, Argentina, and Saudi Arabia. By adding three words to the Competition Act, Minister Champagne can increase innovation, protect small towns, and allow billions of dollars in compensation to be recovered by consumers who have been wronged. We urge Minister Champagne to adopt these changes.

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These “Top Tips” will help you to prepare for these examinations so that you can effectively fulfill your important role as a witness.

1. Tell the truth

• At the beginning of the examination you will be asked to swear or make a solemn affirmation that you will tell the truth when you answer questions.
• Telling the truth is extremely important. False information risks undermining your credibility. It also may come back to “haunt” you later on in the lawsuit.

2. What to wear, your demeanor

• An examination is an opportunity for you to practice giving oral testimony. The impression you convey at the examination will greatly influence the opposing lawyer’s assessment of how you will perform as a witness. Accordingly, it is important to prepare for the examination and to create a good impression.
• Dress in the same way you would for trial (a business suit) and conduct yourself as you would in front of a judge. Be solemn, professional and unemotional. Don’t make jokes. Maintain eye contact with the opposing counsel when answering a question.
• Do not try to avoid difficult questions or topics. If you have concerns about portions of your testimony, discuss these with your lawyer before the examination.
• Stay calm. Losing your temper will not help the accuracy of your answers and it may cause you to say things which you have not carefully considered.
• Don’t bring any notes with you. You will not be allowed to refer to any notes during the examination. However, don’t forget that you can review documents before answering questions about them.

3. Keep your guard up

• The other lawyer may try to “throw you off” or cause you to lose focus. They may try to make you angry or intimidate you.
• Alternatively, the other lawyer may be really friendly with you and try to make you believe that he or she is your friend.
• No matter what strategy the opposing lawyer uses, remember: opposing counsel is not your friend. Assume that opposing counsel knows everything and are very thoroughly prepared. Opposing counsel is there representing the interests of the adverse party. He or she is not there to help you with your case.
• No matter what approach opposing counsel takes, always be on your guard.

4. Make sure you understand the question before you answer

• If you don’t understand the question, or don’t know what the opposing lawyer is asking, say “I don’t understand the question”. Make sure you understand the question before you provide your answer.

5. Answer only the question asked

• Just answer what is asked – no more, no less.
• Often, people will volunteer additional information that was not asked in the question. Don’t infer one question from another. For example:

Q: “Did you watch the hockey game last night?” A: (You may be tempted to answer) “No, I went to bed early.”

Q: “Does your mother live in Canada?” A: (You may be tempted to answer) “No, she lives overseas.”

• However, the question asked calls for a “yes” or “no” answer, only. The other lawyer is not asking you what you did instead of watching the game. The other lawyer is not asking you where your mother lives, he or she is only asking if she lives in Canada. Don’t volunteer additional information that the opposing lawyer didn’t ask for.

6. Don’t guess at answers

• If you are unsure about something, say so. It is very important that you do not guess at what you think the answer might be. There is nothing wrong with saying “I don’t recall at this time” or “I don’t know”.

7. Pause before answering

• Take your time – pause before answering a question. Remember, the “pause” does not show up on the transcript.
• If you get into the habit of pausing, your pause will not be a signal to the other side if you are finding the question difficult.
• Don’t let silence trouble you. The opposing lawyer may pause after you answer a question, inviting you to provide more information. Don’t start talking again to fill the silence. If you’re done answering, stop talking and just wait for the next question.

8. Review documents before answering questions about them

• If you are asked a question about a document, take a moment and review the document before you answer the question.
• Before the examination, you should review the documents at least twice: first, you should review the documents a few weeks before the examination. If, at that time, you have any questions about what is contained in the documents, talk to your lawyer as soon as possible. Second, you should review the documents a few days before the examination. You want to make sure the documents are fresh in your mind before you go to the examination.

9. Lock-in questions (Always, Never, Every, Only, etc.)

• Be careful of “lock-in” questions where opposing counsel tries to get you to agree that you always did something, that you never did something else or that you do or don’t do something every time. For example:

Q: “You lock your car every time you get out of it?”

Q: “You never spoke to Bob about the contract?”

• Lock-in questions can also come up in the context of lists. For example:

Q: “Tell me the all reasons you did X.” A: “The reasons I did X are A, B, C.” Q: “So, you have now told me all of the reasons you did X?” (This is a lock-in question. If you say yes, you will not be able to offer additional reasons at trial should they occur to you.)

• Unless you’re 100% sure that you always/never do a particular thing, it’s best to qualify your answer. For example:

A: “My practice is to always lock the car when I get out of it. But I can’t remember on that specific day if I actually did lock the car when I got out of it.”

A: “At this time I can’t remember ever speaking to Bob about the contract.”

A: “I’ve told you all the reasons that I did X that I can currently recall.”

10. Questions asking you to agree or disagree with something

• If the other lawyer asks you to agree or disagree with a statement, be very careful. There is nothing wrong with agreeing or disagreeing with a statement if you agree or disagree with every part of that statement. However, if you don’t agree with the entire statement you need to make that clear. There’s nothing wrong with clarifying your answer when you respond. For example:

Q: “You’d agree with me that the letter wasn’t delivered until March 15?”

A: “Yes, I would agree that the letter wasn’t delivered until March 15 but there was a postal strike between the time I mailed the letter on March 1 and the time it was delivered on March 15. The strike caused the letter to be delivered late.”

11. Questions that contain assumptions

• Sometimes questions have incorrect assumptions built right into the question. If you don’t agree with the language in the question, make sure you clarify that in your answer. For example:

Q: “When did you destroy those documents?” A: “I discarded those documents in accordance with our business records policy on…”

Q: “When did you abandon the business?” A: “I stopped operating the business on February 22.”

• These types of questions can come up most often in yes/no questions. If you agree with all the language is the question, then just answer yes or no. However, if you don’t agree with all the language in the question, don’t give a yes or no answer. Don’t forget you can qualify your answer when you give it. For example:

Q: “So you only did that job at that store for one week?” A: “Yes, but I had been doing the exact same job at another store for 20 years prior.”

12. Undertakings/refusals

• If your lawyer refuses the question, or says “don’t answer that”, then don’t say anything else until the opposing lawyer asks the next question.
• If the other lawyer asking for an “undertaking” or asks you to provide information after the discovery, let your lawyer respond to that question.

The post Sotos LLP’s top tips on how to be a prepared witness appeared first on Sotos LLP.

Ontario’s franchise protection statute, the Arthur Wishart Act (Franchise Disclosure), 2000, and its associated Regulation put limits on how information about the profitability of the business can be disclosed to the potential buyer of a franchise.

The Wishart Act radically changed the way franchises are sold. Before the Act came into effect, many franchisors would provide a franchisee with a pro forma statement showing profitability at various sales levels. In some cases, few franchisees in the system had ever actually achieved those sales levels. This had the potential to mislead purchasers. Other times, a franchisor would provide back-of-the-napkin profitability information to the purchaser that could not be verified. The franchisor usually insulated itself with disclaimers that told the franchisee not to rely on the information even though the sole purpose of providing the information was to induce the franchisee to buy the business.

The Wishart Act was supposed to change all of that. It requires a franchisor to deliver to the potential buyer of a franchise a pre-sale disclosure document that discloses all material information about the business and the franchise system. If a franchisor wishes to give information about the potential profitability of the franchise, it must do so in the form of an earnings projection in the disclosure document itself. To ensure that the information in the earnings projection is verifiable, the disclosure document must state the reasonable basis for the earnings projection, the assumptions underlying it and a location where information is available for inspection that substantiates the projection. The disclosure document must also contain a certificate attesting to its completeness and accuracy. Failure to comply with these strict requirements exposes the franchisor and the individuals who signed the certificate to significant liability.

Although the Wishart Act has been around for over ten years now, old practices die hard. This is especially true when it comes to statements about the profitability of the franchise. Some franchisors try to circumvent the Act by giving pro formas or profitability statements outside of the disclosure document. Sometimes this is done for the ostensible purpose of assisting the franchisee in preparing a business plan to obtain bank financing. Another method is to send the franchisee an “information package” containing what are said to be “typical” earnings experiences of other franchisees, along with a disclaimer. Many sales brokers employed by franchisors fall into the trap of giving this sort of information to potential purchasers outside of the disclosure document.

All of these practices are now prohibited in Ontario. The only place where earnings information can be disclosed to a potential purchaser of a franchise is in the disclosure document. If the disclosure document says that the franchisor ‘does not provide earnings projections, then no such information can be provided. If the franchisor does provide earnings information, it must provide it in the disclosure document itself and not in any other format.

The Wishart Act was intended to stamp out all forms of representations about earnings other than those contained in a disclosure document. Circumventing the restrictions in the Act can land the franchisor and any franchise sales people in hot water.

The post Popping the question: disclosing earnings potential to franchise buyers appeared first on Sotos LLP.

There are several points that must be considered before a franchisor introduces changes to its business model. The first and most important is whether the franchisor is really contemplating a new or amended form of agreement with its franchisees. The fact that the franchisor believes that the change will improve the long-term profitability of the franchisees themselves makes little difference. Any attempt to impose a different economic model from the model contained in the franchise agreement may be met with strong resistance and possibly system-wide litigation.

Take, for example, the case of a fast-food franchisor which decides to outsource a call centre which it had previously operated as part of its franchisor duties at no extra charge to the franchisee. There are a lot of good reasons why a franchisor would want to outsource this responsibility and just as many good reasons why it would impose a cost-recovery charge for this service. You may be surprised to learn that the franchisor which did this was prevented from imposing any charge on the franchisee for this service. In the words of the Quebec Court of Appeal, imposing the call-centre fee on the franchisee would result ‘in a different contract’. In the court’s view, the changes implemented by the franchisor went ‘beyond the intent of the parties’ and that ‘required the consent of the franchisees.’

The result in that case is all the more surprising considering that the franchise agreement specifically contemplated that the franchise system could be changed and that the franchisee was bound to accept such changes introduced by the franchisor from time to time. Even in the presence of a broad system-change clause such as this, the court required the franchisor to obtain the specific consent of its franchisees before implementing the change.

The post Proceed with caution when changing the franchise system appeared first on Sotos LLP.

The Regulations under Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000 (“AWA”), c. 3,[1] Alberta’s Franchises Act, R.S.A. 2000, c. F-23 (“Alberta Act”),[2] and Prince Edward Island’s Franchises Act, R.S.P.E.I. 1988, c. F-14.1 (“PEI Act”)[3] all require disclosure documents or statements of material change given to prospective franchisees to include a certificate that is dated and signed by at least two officers or directors of the franchisor, or by one officer or director where there is only one.[4]

The certificate is designed to ensure that the information given to prospective franchisees is accurate, complete and timely.  It ensures accuracy by imposing personal liability for misrepresentations on the individuals who sign the certificate, regardless of whether those individuals had any involvement in the actual sale of the franchise to the prospective franchisee.[5] This is intended to ensure a high degree of personal accountability that the information contained in the disclosure document is entirely truthful.

It ensures completeness by requiring the individual signing the certificate to certify that all of the information required by statute is contained in the disclosure document, including not only the prescribed information, but also all material facts concerning the franchise.  Because of the broad definition of “material fact” in the legislation, the signer of the certificate must certify that the disclosure document provides the prospective franchisee with all of the information which would potentially affect either the franchisee’s desire to purchase the franchise, or the price paid for the franchise.[6] In hierarchical franchise organizations, knowledge of all material facts may not reside in the individuals who sign the certificates.  Since these individuals have personal liability for material fact omissions, the liability attaching to the certificate motivates these companies to adopt a set of internal procedures to ensure accurate and complete disclosure, with someone at each level of the organization attesting to accuracy and completeness of the information.

The legislation ensures the timeliness of the information contained in the disclosure document or statement of material change by requiring that the certificate be dated.

Who Must Sign the Certificate?

The regulations under the AWA, the Alberta Act and the PEI Act each require, as a general principle, that the certificate be signed by two officers or directors of the franchisor.  In exceptional circumstances, where the franchisor has only one director and officer, the regulations allow franchisors to give to potential franchisees disclosure documents that only contain one signature.

Unlike the Alberta Act, the AWA does not define the term “officer”.  This leaves open the question of whether a person’s status as officer will be determined with regard to the internal corporate resolutions of the franchisor, or by how the person is held out to the outside world, in other words, the “indoor management rule”.[7]

Black’s Law Dictionary refers to an officer, in corporate law, as a person elected or appointed by the board of directors to manage the daily operations of a corporation.[8] Accordingly, if the issue is to be determined according to the indoor management rule, any person who holds him or herself out to be an officer (say, for example a Vice-President) could be an officer for the purposes of the AWA, even if that person has not been formally appointed as such by the directors.  The rather informal way in which many small companies use titles such as “Vice President”, without properly approving such status at the directors’ level, raises the issue of whether such unappointed individuals should be considered officers for the purposes of signing the disclosure document.

The Alberta franchise legislation defines an “officer” as:

1. the chair or vice‑chair of the board of directors or the president, vice‑president, secretary, assistant secretary, comptroller, assistant comptroller, treasurer, assistant treasurer or general manager of a corporation,
2. any individual who performs functions or acts in a capacity similar to the functions or capacities referred to in subclause (i), or
3. any individual designated as an officer of a corporation by bylaw or similar authority of the corporation;[9]

This broad definition indicates that a person’s status as an officer can be determined by the title the person uses in his or her communications with the outside world, the actual functions the person performs, or the person’s formal status according to the by-laws or resolutions of the company.  In other words, officer status can be determined by having regard to the indoor management rule or the formal status of the individual according to the company’s records.  It is quite likely that even in the absence of a legislative definition such as in the Alberta Act, the substance-over-form standard would apply in Ontario, Prince Edward Island and New Brunswick.  To hold otherwise would be to allow corporate formalities to override the intention of the legislation which is to ensure at least dual accountability for the contents of the disclosure document by the senior management of the franchisor.

The significance of this is that the number of franchise systems which have only one true officer and director will be few and far between.  Most franchise system require more than one key individual to operate, even at the start-up phase.  Even the smallest franchisor will likely employ one or two lieutenants to assist in carrying out the many daily requirements of the system such as overseeing franchise operations, negotiating with landlords, and signing banking documents.  Extra care should therefore be taken when preparing disclosure documents to inquire into the actual roles of key persons within the organization rather than simply relying on the corporation’s public filings or directors’ resolutions to ascertain whether there are two or more individuals who are required to sign the disclosure document.

By not having at least two officers or directors sign the certificate when at least two people are, objectively speaking, carrying out those roles, the certificate may be open to serious challenge.  The Regulations under the AWA, the Alberta Act and the PEI Act all state that the disclosure document “shall” include a certificate which “shall” be signed by two officers or directors where there is more than one.  In light of the recent Alberta Court of Appeal decision, discussed below, the implications of a defective disclosure document may be quite far-reaching.

The post Lynchpin of Disclosure: The Certificate appeared first on Sotos LLP.

Arbitration agreements are an increasing fact of life in franchise relationships[1].  But even as Canadian franchisors and franchisees amass greater experience with arbitration as a means of dispute resolution, arbitration clauses are still too often viewed as “boilerplate”.  From the drafter’s standpoint, the desire to draft a compendious franchise agreement means that arbitration clauses are kept to the bare minimum and are relegated to the “Miscellaneous” section of the franchise agreement.  As a result, few agreements carefully define which disputes are subject to or exempt from arbitration, and even fewer speak to the manner in which arbitrators are selected.  Once the relationship sours, it is surprising to find just how costly and frustrating a deficient arbitration agreement can be to all parties.  A poorly drawn arbitration agreement can actually render arbitration a more costly and less timely process than traditional litigation.

Advantages of Arbitration Clauses in Franchise Agreements

Conventional wisdom holds that it is generally in a franchisor’s interest to insist on an arbitration clause in a franchise agreement.  While there can be little doubt that arbitration offers many advantages over conventional litigation, the decision of whether or not to include an arbitration clause, and how it should be drafted, should proceed from a careful analysis of the pros and cons.  The most obvious advantage which arbitration offers over traditional litigation is its relative speed.  If the arbitration agreement specifies a method of appointment, an arbitrator can be appointed within days and a hearing convened long before a trial date would otherwise be available.  The ability to tailor the proceeding to the nature of the dispute means that the length of a hearing can be restricted so that it bears some proportion to the amount in dispute.  The arbitrator can also be compelled to render an award within a fixed period of time, thus avoiding the long periods of reserve which can slow down the litigation process.  In addition, the parties can choose to render any decision of the arbitrator final thereby eliminating appeal delays from the process.

Another welcome feature of most arbitration Rules is that they generally require arbitrations to be conducted in private, away from the prying eyes of media, the general public and other franchisees.[2] The arbitral decision itself can be rendered confidential so long as neither side appeals the decision to the courts.  In this way, an adverse arbitration award which is not appealed will generally have little or no precedential value for other franchisees in the system and will therefore not adversely affect the franchisor’s relations with its other franchisees.

Arbitrations also tend to be less procedure-driven than traditional litigation.  Parties can agree to any number of procedural shortcuts.  In appropriate cases, an arbitrator can be directed to summarily decide the dispute based solely on a written record, or place strict limits on the duration of oral evidence.  Pre-arbitration hearings and motions are typically conducted by phone without the need for lengthy affidavits and facta.  Discovery rights and obligations are also less expansive than under the rules of civil procedure.  All of this amounts to substantial cost savings for both sides.  Because of its more relaxed rules and faster timelines, arbitration is generally considered the forum of choice when parties are engaged in an ongoing relationship and must deal with each other every day.  Arbitration places the focus on the substantive issues and resumption of normal business relations rather than on costly procedural wrangling.

A further benefit of arbitration agreements to franchisors is that they may in some cases prevent franchisees from bringing a class action.[3] While this consideration might not have been a factor when many franchise agreements currently in circulation were drafted, class actions have evolved considerably within the past few years.  The rise of class actions in Canada may give rise to a renewed interest in arbitration agreements as a potential shield for the franchisor.[4]

While the advantages of speed and efficiency apply equally to the franchisee, many practitioners believe that arbitration does not favour the franchisee to nearly the same extent as it favours the franchisor. Many franchisees, for instance, instinctively feel that litigation conducted in the public eye is preferable to arbitration conducted behind closed doors.  The public forum offers the franchisee the possibility to counter the franchisor’s superior financial resources with adverse publicity or the prospect of a bad legal precedent. Franchisees also quickly become aware that courts are taxpayer-funded while the costs of an arbitrator must be paid upfront by the parties.

In reality though, the primary drawback of arbitration for franchisees is that it offers more limited rights of discovery than traditional litigation. Broad discovery is of greater concern to the franchisee than the franchisor since the franchisor usually possesses the information which the franchisee needs to establish liability. For the franchisee, the ability to access a judge and seek sanctions if the franchisor is not complying with its discovery obligations is critical to its ability to prove its case. A franchisee will likely be dissuaded from advancing an ambitious counterclaim in response to a Notice of Arbitration if it knows that its discovery rights will be severely curtailed.

The post Arbitration Agreements and the Franchise Dispute: the Likely, the Unlikely and the Imponderable appeared first on Sotos LLP.

One of franchising’s more pervasive assumptions is that a franchise agreement and sublease are inextricably bound together and cannot be viewed in isolation.  Over time, this view has become ingrained to the point where the distinction between these two very distinct agreements is often overlooked, particularly at the time of termination.

The source of this assumption is that, taken together, the franchise agreement and sublease appear to form a code governing all aspects of the parties’ contractual arrangements.  Two Alberta cases reinforce the notion that the franchise agreement is the “dominant” agreement and the sublease merely an adjunct.[1] Many franchisors and counsel assume when planning terminations that cross-default provisions commonly found in franchise agreements and subleases provide the unfettered right to terminate subleases without having to consider the effect of tenant protection legislation.

This truism may now be a little less true following the recent Ontario decisions of Majdpour et al. v. M&B Acquisition Corp. et al.[2] and 3P3W Holding Co. v. Nguyen[3].  These decisions recognize the independence – if not the primacy – of the lease in the franchise relationship.  They are also a reminder of the risks of failing to take this fact into account when terminating the relationship.

Majdpour was an application by a group of former franchisees of the Moneysworth & Best franchise system.  Following the franchisor’s voluntary bankruptcy in July, 2000, the franchisees served notice on their head landlords under section 39(2) of the Commercial Tenancies Act[4] (CTA).  That section entitles a subtenant to assume a direct tenancy with the head landlord by providing notice to that effect within 90 days of the head tenant’s bankruptcy. This statutory right of the subtenant is superior to the right of the trustee in bankruptcy to assign the lease to a third party.[5]

Within two months of the bankruptcy, the trustee in bankruptcy purported to assign the bankrupt franchisor’s interest in the leases, subleases and franchise agreements to a newly formed company called M&B Acquisition Corp (M&BAC).  Following the assignment, M&BAC disputed the franchisee’s rights to assume a direct tenancy, claiming that they did not meet the requirements of section 39(2) of the CTA.

At the hearing, the franchisees argued that, regardless of whether the franchise agreements had survived the franchisor’s bankruptcy, they were no longer bound by the subleases because they had exercised their rights under section 39(2).  M&BAC countered that the sublease and the franchise agreement were integrally linked.  According to this argument, if the franchise agreement was still valid, the sublease simply could not be allowed to terminate by operation of law.  M&BAC also argued that the franchisees did not come within section 39(2) because the head landlords had not previously consented in writing to the subleases.

The court concluded that while the franchise agreement had survived the bankruptcy, the franchisees were nevertheless entitled to assume a direct lease with their head landlords and be released from the subleases.  In coming to this conclusion, the court rejected the argument that the franchise agreement and the sublease must be read as a whole.

The court’s approach in this case is consistent with the decision of the Ontario Court of Appeal in 3P3W Holding Co. v. Nguyen.  In that case, a franchisee was permitted to remain in possession of the premises after termination of the franchise agreement even though the franchise agreement expressly contemplated that the sublease came to an end with the franchise agreement.

The courts in Madjpour and 3P3W Holding Co. are more concerned with the franchisee’s rights as tenant than with any notion of the pre-dominance of the franchise agreement.  These cases stand in contrast to the dicta in Phil’s Restaurants Ltd. v. Parkmount Inv. Ltd.,[6] a case frequently cited for the proposition that a sublease is merely collateral to the franchise agreement.  In that decision, Dixon J. ventured to say that the franchise agreement “was intended to be the governing document with the sublease being a necessary complement thereto.”  Or, as more bluntly stated by Master Funduk in C. Corp. (Ontario) Inc. v. E. & S. Kramps Holdings Ltd.[7]:

“The sublease and the franchise agreement cannot be separated.  The franchise agreement is the life support system for the sublease.  Once that life support system is turned off (as both parties agree it has) the sublease cannot breathe on its own.”

While such broad statements may appeal on an intuitive level, they must now be regarded as questionable guideposts for the prudent franchisor. The franchise agreement is certainly the lifeblood of the franchisor, but the sublease is the body and soul of the franchisee.  In terms of investment in a typical franchise, the franchisee will have sunk far more into leasehold improvements than it will have paid for a franchise fee.  Tenant protection legislation such as the CTA was enacted to protect all tenants, including franchisees.  In the absence of clear waivers of such protection, franchisee/subtenants will understandably be reluctant to view their tenant rights as subordinate to the franchisor’s wide powers of forfeiture.

A second issue which arose in Majdpour was whether the covenants in the sublease requiring the subtenant to perform all obligations under the franchise agreement could even be enforced by M&BAC as successor franchisor/sublandlord assuming that the sublease relationship survived.  Although the court did not address the point (having found that the subleases had effectively been brought to an end), the issue may yet be considered when the case comes before the Court of Appeal in October, 2001.  The answer may depend on whether the franchise-related covenants in the subleases are considered personal covenants or, alternatively, covenants that “run with the reversion.”

A covenant is said to run with the reversion when either the liability to perform it or the right to take advantage of it passes to the landlord’s assignee.  Originally, at common law, if the reversion was assigned, the assignee did not get the benefit of any covenant made by the lessee, except for payment of rent.  A landlord’s assignee could not enter upon the leased premises if the tenant breached any other covenant.[8]

This was changed by the adoption of the Grantees of Reversion Act, 1540 (Eng.), c. 34 and, in Ontario, section 4 of the Commercial Tenancies Act.[9] However, section 4 and the corresponding section of the English statute apply only to covenants which concern the land demised.  Collateral or merely personal covenants remain unenforceable by the landlord’s (or sublandlord’s) assigns.[10]

The rules for determining whether a covenant or condition runs with the reversion are the same as those governing covenants which run with the land.  Various attempts have been made to define covenants which run with the land[11] but the leading texts mostly provide case-by-case examples.[12] On balance, it could be said that covenants which run with the land are those which directly benefit or concern the premises.  The obligation to pay rent, insure the property and keep the premises in a good state of repair are all obvious examples of this type of covenant.

It is difficult to see how the requirement contained in subleases that the franchisee perform each obligation under the Franchise Agreement (which often includes the Operations Manual) could be viewed as touching or concerning the land.  These covenants exist mostly for the benefit of the franchisor and the franchise system.  They generally have little to do with the leased premises.

In fact, some covenants typically found in franchise agreements have already come under analysis by the courts and been found to be merely personal.  For instance, in Mitchell v. McCauley[13], the Ontario Court of Appeal held that a condition in a lease that provided that the lease could be terminated if a writ of execution was levied against the goods of the tenant was found to be collateral and could not be enforced by the lessor’s assign.

Similarly, in Walsh v. Walper[14], the Ontario Divisional Court held that a tenant’s covenant to apply for a liquor licence and assign the licence to the lessor at the expiry of the term was personal and unenforceable by the landlord’s assign.  Would a covenant that a franchisee pay royalties or deliver sales reports to the franchisor necessarily be any different?

If a court finds that most or all of the covenants in a franchise agreement are personal, the successor franchisor/sublandlord may be prevented from terminating the sublease for breach of those personal covenants.  The subtenants, while still contractually bound by the franchise agreement, could not be dispossessed upon termination of the franchise agreement.

Arcane as it may seem, this factor could play a significant role in the sale of a franchise system.  To avoid the problem, successor franchisor/sublandlords would either have to purchase the shares of the predecessor company or ask the franchisees to sign new subleases directly with the successor company.  Franchisees would presumably require concessions before agreeing to do this.  It would be prudent to take this into account when advising on a potential purchase of a retail franchise system.

It is not surprising that the courts are beginning to view the property law aspect as distinct from the strictly contractual rights of the franchise agreement.  Franchisors who choose to maintain a headlease-sublease relationship enjoy tremendous powers compared to parties in a typical licencee-licensor or distributorship relationship.  While franchisors are accustomed to terminations, courts generally do not look favourably upon the remedies of re‑entry and forfeiture.  They have insisted on strict compliance with notice requirements and will treat improper lease terminations as trespasses.[15] If the franchisor’s intent is for the franchisee to contract out of tenant protection legislation, specific wording to that effect is required in the sublease.

The lesson of Majdpour and 3P3W Holding Co. is that bad practice, however widespread, does not make good law.  The preferred approach is to analyze the franchise agreement and lease separately and with regard to their distinct legislative underpinnings.  Rather than viewing the sublease as a collateral or secondary agreement, a franchisor must strictly follow all statutory and contractual conditions concerning the leasehold relationship.  Effective representation requires counsel to be ever mindful of these differences.

[1]Phil’s Restaurants Ltd. v. Parkmount Inv. Ltd. [1989] A.J. 223 (Alta. Q.B.) and C. Corp. (Ontario) Inc. v. E. & S. Kramps Holdings Ltd.[1989] A.J. No. 757 (Master)

[2][2001] O.J. No. 1113 (S.C.) (currently under appeal)

[3][2000] O.J. 139 (Ont.C.A.)

[4]R.S.O. 1990, c. L.7

[5]For a discussion of the application of subsection 39(2) of the CTA in franchising, see F. Zaid, Canadian Franchise Guide Vol. 1, Carswell Looseleaf ed., pp. 2-967 to 2-968 and M. O’Reilly, Q.C. “Bankruptcy and Insolvency – Its Effect on Franchising” 45 C.B.R. 182

[6]Supra, note 1

[7]Supra, note 1

[8]Williams & Rhodes, Canadian Law of Landlord and Tenant Vol. 1, 6^th ed. (Carswell, 1988) at p. 15-65

[9]R.S.O. 1990, c. L.7

[10]Williams & Rhodes, supra at p. 15-65

[11]Many of these are described in the case of Caerns Motor Services Ltd. v. Texaco Ltd. [1994] 1 W.L.R. 1249 (Ch.)

[12]See for example, Williams & Rhodes, at pp. 15-78 to 15-83; Woodfall Landlord & Tenant, (Street & Maxwell, Looseleaf ed.) at pp. 11-32-1 to 11-36

[13](1892), 20 O.A.R. 272 (C.A.)

[14](1901), 3 O.L.R. 158

[15]See Re 780046 Ontario Inc. and Columbus Medical Arts Building Inc. (1994), 20 O.R.(3d) 457 (C.A.); Ellis v. Breslin (1974), 2 O.R. (2d) 532 (H.C.J.); Mount Citadel Ltd. v. Ibar Developments Ltd. (1976), 14 O.R. (2d) 318 (H.C.J.); Koumoudouros v. Marathon Realty Co. (1978), 21 O.R. (2d) 97 (Div. Ct.)

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