Buying a Franchise in Canada. Tony Wilson

      2.1 Who holds the deposit?

      The most important practical problem at this stage is, who holds the deposit and how do you get it back if the deal falls apart? The deposit is going to be held by either the franchisor or the franchisor’s commissioned salespersons. If you decide not to go further in the process, cannot acquire bank financing, or do not approve the location the franchisor has subsequently chosen and you request the deposit monies to be returned, the money may be difficult to get back. In some systems, the franchisor or its sales agents have already spent the deposit monies and are waiting for other deposit monies or initial franchise fees from other franchisees that will be used to repay you if you are seeking your money back. This could take months, and legal action respecting return of deposit monies is not cost-effective for you if you are forced to hire a lawyer to commence legal proceedings. So when you ask for the money back, it’s gone, and it may be gone for some time. (By the way, this does not usually happen with Canada’s established franchisors.)

      One option is that if you are able to approach your lawyer in advance of signing the deposit agreement, deposit monies could be placed either in trust with your lawyer or in trust with the franchisor’s lawyer on undertakings to return these monies immediately upon you deciding not to enter into the franchise agreement. Be aware that franchisors or their sales agents may delay the return of deposits for the aforementioned reason or to give one more try at the sales process.

      For lawyers, nothing speaks louder than an undertaking, which is a contract between the lawyer accepting the undertaking and the person putting the lawyer on the undertaking. Lawyers who fail to comply with undertakings risk disciplinary action by their Law Society. Although some franchisors aren’t fond of this approach, it is an efficient means of ensuring that the franchisor knows that you are serious while at the same time ensuring that if the deal does not proceed, the money hasn’t been spent and can be returned quickly to you. It shows that if you’re still just a tire kicker, you’re a smart one!

      Undertakings placed on lawyers have a way of focusing a lawyer’s attention. Lawyers aren’t keen on receiving disciplinary letters from their Law Societies, let alone disbarment. So its probably fair to consider holding the deposit in trust with a lawyer — even the franchisor’s lawyer — when dealing with a start-up franchisor with a limited or non-existent track record, or if you are dealing with a start-up regional franchisee (i.e., a master franchisee for a province that is not the same entity that controls the US franchise rights), or if you’re dealing with commissioned sales agents in the previously cited circumstances.

      The well-known and established franchise companies don’t normally spend the deposit monies before they receive the initial franchise fee. They aren’t adding much to the bottom line by trying to keep $1,000 of your deposit money. I’d probably take the established franchisor’s word that your money will be returned forthwith and I probably wouldn’t put the deposit money in trust with a lawyer. (Most of Canada’s established franchise community are members of the Canadian Franchise Association. If the franchisor you’re dealing with isn’t, ask why.)

      The established and reputable franchisors will return the monies forthwith; however, certain deposit agreements may contain a provision whereby the franchisor is entitled to deduct a portion to compensate it for its administrative time. This portion may vary. Usually the agreement will say a reasonable amount and the parties are left figuring out what reasonable is. For example, if a franchisor kept $1,000 out of a $5,000 deposit, it wouldn’t be unreasonable unless the deposit agreement said “fully refundable.” This depends on the costs the franchisor has incurred.

      As an aside, if there are significant conditions in the future to be satisfied by the franchisor (e.g., securing a location), having all or a portion of the initial franchise fee held in trust by your lawyer or the franchisor’s lawyer may also be a means of “getting it back quickly” in the event the condition is not satisfied but the money has been paid.

      2.2 Ontario and Alberta regulations on deposits

      As noted above, Ontario and Alberta have specific regulations on deposits for the acquisition of franchises. In particular, no deposit can be taken by a franchisor for an Ontario franchise, and no agreement can be signed unless disclosure has been made pursuant to the Ontario Arthur Wishart legislation and the requisite time period has passed. A deposit agreement will be deemed to be a franchise agreement under that statute. (For more information about disclosure agreements, see Part 3.)

      In Alberta, fully refundable deposits may be taken prior to disclosure by the franchisor, but only in an amount not more than 20 percent of the franchisor’s initial franchise fee, and only where any deposit agreement is limited to dealing with the deposit, the location or territory, and confidentiality and non-use of the franchisor’s information and materials.

      Sample 1 is an example of a deposit agreement. It contains a few interesting errors.

       Sample 1: Deposit Agreement (Ontario)

       Emma & Jeremy’s Internet Café & Donut Emporium Ltd.

       DEPOSIT AGREEMENT (Ontario Only)

      1. The Applicant, _________________, hereby makes application to be considered for an Emma & Jeremy’s franchise with the Franchisor, Emma & Jeremy’s Internet Café & Donut Emporium Ltd. upon substantially the same terms and conditions as are set forth below and such other terms and conditions as are generally contained in the Franchisor’s standard form of Franchise Agreement.

      2. The Applicant understands that prior to executing the Franchise Agreement, the Franchisor may furnish information and material that will be of a confidential nature concerning the Franchisor and the franchise system including, without limitation, the contents of the Franchise Agreement, the Franchisor’s operations and other manuals, and the Franchisor’s training and other materials (the “Confidential Information”). The Applicant acknowledges that the Confidential Information is the property of the Franchisor and that —

      (a) it will not make or allow to be made copies of all or any part of the Confidential Information;

      (b) it will not publish or allow to be published all or any part of the Confidential Information;

      (c) it will not disclose or allow to be disclosed to any person, firm, or corporation, directly or indirectly, the contents of all or any part of the Confidential Information;

      (d) it will not retain all or any part of the Confidential Information and will return all of the Confidential Information to the Franchisor on demand;

      (e) it will not make any use of all or any part of the Confidential Information for its own purposes or for any purpose other than pursuant to an agreement reached with the Franchisor, and will keep and respect the confidentiality of the Confidential Information for so long as all or any part thereof shall remain confidential to the Franchisor;

      (f) it will not carry on any business similar to the franchised business in the event that the parties do not enter into a franchise agreement

      3. The Applicant encloses herewith a deposit in the amount of $10,000. It is understood that if the Franchise Agreement is entered into between the Franchisor and the Applicant, such amount will be credited towards payment of the initial franchise fee without interest or deduction.

      4. Upon receipt of notice of acceptance of this Application from the Franchisor, the Applicant shall have ten ( 5 ) days in which to enter into the Franchise Agreement with the Franchisor, and pay the balance of the initial franchise fee of $30,000. In the event that the Applicant fails to enter into the Franchise Agreement and pay the balance of the initial franchise fee within the above-mentioned time period, the Applicant understands and agrees that the deposit referred to in paragraph 3 hereof will be returned within a reasonable period of time to the Applicant with a reasonable set off for the Franchisor’s administrative expenses.

      5. If