Posted by Elizabeth Gore-Jones
on 19 September 2022
You will recall that we examined a Franchisor’s potential $10,000,000 penalty for a failure to disclose changes to a Franchisor’s Intellectual Property within 14 days of the change occurring.
There are number of situations in which a Franchisor may incur such a penalty if it fails to disclose materially relevant facts within 14 days of occurrence.
Another situation of which Franchisors may not be aware includes interim updates of Financial Statements or Audit Reports created as required under the disclosure process.
If the Franchisor issues disclosure to a prospective franchisee and, prior to that franchisee signing the Franchise Agreement, the Franchisor has new financial statements or Audit Reports prepared, then the Franchisor must provide a copy of those Financial Statements and / or Audit Reports to the prospective franchisee as soon as possible but in any event before the franchisee enters into a Franchise Agreement.
This is a situation which occurs quite commonly if the franchisee receives disclosure at the end of June or from July through to October and prior to the Franchisor updating its Disclosure Document (the franchisee may have been provided with the soon to be updated Disclosure Document).
Significant penalties apply and as such Franchisors need to be aware of their obligations.
