By Peter Snell
Changes happen in life. The dynamic franchise business environment is no exception. Sometimes the changes are calculated, and other times they are completely out of control. In any case, whether planned or unplanned, changes that occur within a franchise system may require the franchisor to stop and consider whether the change is “significant” to any prospect currently considering a change. buying a franchise. This can lead to a document called a material change report.
Although the following information serves as a general overview, as always, one should seek one’s own legal advice when reviewing any franchise document. Only then is it possible to obtain specific information and advice tailored to the particular circumstances.
What is a material change report?
All provinces with franchise legislation require a material change report in certain circumstances. This document is part of the franchise disclosure process. It is often not necessary for a franchisor to provide a prospective franchisee with a material change report; however, it is very common for a franchisor to provide one. If one is provided, a potential franchisee should not be concerned.
The document is a notice to prospective franchisees that a “material change” has occurred since the Franchise Disclosure Document (FDD) was issued to the prospective franchisee. It provides new or changed information from what was included in the original document. It effectively supplements the disclosure found in the original FDD.
When must a material change report be provided?
A written statement of any material change must be provided to a prospective franchisee as soon as possible after the change occurs and before the earliest of the following:
a) the signing of the franchise agreement, and
(b) the payment of any consideration relating to the deductible.
The expression “as soon as possible” is generally understood to mean as soon as possible. The timing of document delivery is important. If provided after the prescribed events, it may be insufficient disclosure or no disclosure at all.
The material change report is treated as an extension of the FDD. If a material change has occurred within a franchise and a franchisee signs the contract without seeing any documentation, then disclosure to the franchisee will be considered insufficient. Franchisors do not want to find themselves in a position where there has been a failure to adequately disclose to a franchisee.
If the material change has not been brought to the attention by means of a material change report before the execution of the franchise agreement or the payment of any consideration relating to the franchise, the franchisee will be able to rely on provincial legislation. on the deductibles and repairs provided for by these regulations.
This document, unlike the FDD, will not be necessary for the signing of each franchise contract. The trigger for the production of a statement of material change, as indicated in the label of the document, is the occurrence of a “material change”.
Although there is a mandatory requirement when there is a change that meets the threshold of a “material change”, these documents are often provided to franchisees even when there are changes that may not be material. The franchisor does not necessarily believe that all of the information contained in the material change report should be considered a material change, as at least some of the information may not meet the threshold established by law. Thus, the franchisor can provide this document to a franchisee on a voluntary basis, simply to send him additional information to that provided in the FDD.
The law does not mandate a form for the material change report, but the careful care given to the creation of an FDD by a franchisor must also be given to the material change report. The law states that the information in this document, like an FDD, must be presented “accurately, clearly and concisely.” If a material change report contains misrepresentations, the franchisee is deemed to have relied on the misrepresentation. Failure to exercise due care and attention may result in damages owed by a franchisor to a franchisee under provincial franchise legislation or in the cancellation of the entire franchise agreement.