Franchise rescission no relief from loan obligations

Written by on August 31, 2018.

Last week, Perell J. granted summary judgment to the Royal Bank of Canada (“RBC”) for indebtedness owed by Everest Group Inc. (“Everest”), a franchisee which had sought to rescind its franchise agreement.[1] Perell J. refused to require the bank to forebear exercising its rights until the franchisee could be refunded amounts claimed in accordance with the rescission.

In late 2015, Everest entered into a franchise agreement with Paramount Fine Foods to operate a restaurant at Yorkdale Mall in Toronto. Three individuals signed the franchise agreement as guarantors. Everest arranged financing through RBC, signing various loan and security agreements. The same three individuals signed guarantees. Among other things, the events of default under the agreements included ceasing to operate the restaurant.

Everest’s franchise operation was not profitable. After spending approximately $2.4 million to acquire and build the franchise, Everest sought to rescind the franchise agreement under s. 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Wishart Act”).[2] Everest delivered a Notice of Rescission to the franchisor and, a few days later, ceased to operate the restaurant. The franchisor disputed the rescission. At the time of this judgment, that matter remained unresolved.

RBC took the position that Everest’s actions constituted an event of default, making written demand for repayment of the indebtedness and written demand on the guarantees. After commencing an action against Everest and the guarantors, RBC brought a motion for summary judgment. Everest took the position that “the loan agreements and the guarantees should be interpreted in light of RBC’s knowledge that it was financing a start up franchise, which has a two-year right of rescission” under the Wishart Act.[3] It argued that RBC should wait for the indebtedness to be repaid out of the amounts returned on rescission, once received from the franchisor.

Perell J. found that there were several events of default under the various loan agreements and guarantees. Unpersuaded by Everest’s arguments, Perell J. held that there was no basis for reading into the clear terms of the loan agreements a provision that would require RBC to forebear exercising its rights due to the nature of Everest’s business.[4] He added that it would not make common sense for a lender to agree to such a limitation on its rights in the face of an event of default.[5] Further, there was no basis for finding that RBC was subjectively or objectively unreasonable in exercising its discretion to enforce its rights; “rather, the evidence establishes that it was both expected and reasonable for the bank to enforce its security and its loan obligations”.[6] The outcome of the franchise rescission proceedings was far from certain. It would not be reasonable for RBC to wait to enforce its rights until the franchisee had been refunded amounts in accordance with its rescission claim.

Any franchisee seeking to rescind its franchise agreement must therefore keep in mind that lenders won’t be required to await the outcome of a franchise rescission claim to enforce indebtedness.

[1] Royal Bank of Canada v Everest Group Inc, 2018 ONSC 4973 [RBC]. See also companion case Royal Bank of Canada v Versatile Holdings Inc, 2018 ONSC 4971, which had the same result.

[2] SO 2000, c 3.

[3] RBC, supra note 1 at para 37.

[4] Ibid at para 50.

[5] Ibid at para 51.

[6] Ibid at para 53.

Posted in Franchises