Franchisors' obligations towards the franchisee in the context of a leasing transaction

4 minute read
01 March 2015

In Québec, franchisors often lease or sublease premises to their franchisees in order to retain control over the conduct of operations by the latter. In such instances, franchisors and franchisees will enter into a franchise agreement and a separate lease or sublease agreement, both of which provide a different set of obligations to which the parties are bound. Although the agreements are entered into and negotiated separately, what are the obligations resulting from a franchise agreement that may affect a leasing transaction?

This question was recently analyzed in the Québec case 9103-1658 Québec Inc. c. Café Vienne Canada Inc.1 The Superior Court found that the franchise agreement imposes on the franchisor a duty to inform the franchisee of issues relating to the renewal of the lease of the premises occupied by the franchisee, as well as a duty to take reasonable means to prudently and diligently renew said lease if requested by the franchisee.

The facts of the case are as follows: the franchisor entered into a franchise agreement with the franchisee, whereby the franchisee had an option to renew the agreement. Simultaneously, the franchisee entered into a sublease agreement with the sublessor, a member of the franchisor’s group who had entered into the main lease with the landlord. Following the termination of the main lease due to a stalemate in the negotiation process, the franchisee sued the sublessor and the franchisor on the grounds that they had been negligent during the negotiation process and that they had failed to adequately inform and protect the interest of the franchisee in the main lease.

The Court found that the franchisor and the sublessor did not fulfil their duty to inform the franchisee by failing to advise him of the progress and outcome of the negotiations, of the landlord’s position and of the delay to accept the terms and conditions offered by the landlord.

In this case, the Court clearly stated that the duties of information and diligence to which the franchisor is bound arise from the franchise agreement and not from the sublease agreement. In fact, the franchise agreement contains the following clause relating to the franchisee's renewal option:  

"4.a)iii) the franchisor or the franchisee may renew the lease of the premises during the renewal period".

(liberal translation)

The sublessor and the franchisor's obligation to negotiate the renewal of the main lease results from this provision and not from the sublease agreement. However, the Court stated that, in this context, the franchise agreement and the sublease agreement are intrinsically related and cannot exist independently.

Therefore, in the context of a leasing transaction in Québec, we are of the opinion that franchisors must be aware of the obligations imposed upon them by the franchise agreement, since they may be more onerous than the obligations set out in the lease or sublease agreement. As to franchisees, they must always ensure that the franchise agreement references the lease or sublease agreement in order to ensure that their rights as lessees or sublessees are enforceable against the franchisor.

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