Although franchisors generally hope to avoid the closure of any of their franchised locations, there are circumstances where a business simply does not succeed. In many cases, franchisors aim to manage that closure or transfer cooperatively or collaboratively and without formal dispute. However, where a franchisee has invested significant time and resources, or the relationship between franchisor and franchisee has broken down, the franchisee may respond by raising the prospect of litigation or otherwise engaging in conduct that does not comply with the requirements of their franchise agreement, such as abandoning the premises.

Reported and applicable case law in this area is relatively limited.  One reason is practical: it often does not make economic sense for a franchisor to pursue litigation against a departing franchisee through to judgment, no matter how egregious the franchisee’s conduct may be. With that said, this article considers the existing case law with respect to the legal rights and remedies of franchisors in termination or abandonment scenarios, including with respect to arrears (expenses overdue at the time of termination) and damages incurred during and after the termination.

The following analysis assumes that the franchisor has either terminated the franchise agreement or that the franchisee has vacated its premises and no longer intends to comply with the terms of the franchise agreement.

Arrears Upon Franchisee’s Termination or Abandonment

Arrears are generally straightforward. Subject to the parties’ agreement to the contrary, a franchisee’s pre-termination arrears for items such as rent, supplies, royalties, and marketing fund contributions will typically survive the abandonment or termination of the franchise agreement.

In one decision, the Ontario Superior Court awarded the franchisor (by way of its counterclaim) the liquidated amounts for supplies, rent, royalties, and marketing fund arrears under the franchise agreement, accrued for the period prior to three franchisees’ abandonment of their units: Premium Host Inc. v. Paramount Franchise Group, 2023 ONSC 1507.

Similarly, in another case, the Ontario Court of Appeal upheld an award to the franchisor for both unpaid construction invoices and an unpaid deposit amount that the franchisee had never paid under its lease agreement: Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62.

As a practical matter, arrears should be communicated to the franchisee by the franchisor with a detailed account statement. In addition, these statements should be delivered on an ongoing basis and reiterated in a timely manner after the franchisee is terminated or after they abandons their business. Documenting arrears establishes a strong evidentiary record that such amounts became due prior to the termination of the franchise agreement.

Expenses Associated with the Termination

Oftentimes, the franchisee’s very act of abandonment or termination will cause a franchisor to incur expenses. This could include the costs associated with cleaning up the condition in which the unit has been left, as well as the costs associated with removing unusable supplies or equipment from the unit.

Whether such costs can be recovered from the departing franchisee will depend primarily on what the parties agreed to in their franchise agreement. In many franchise agreements, franchisees agree to compensate the franchisor against any  expenses associated with enforcing the franchisor’s rights and remedies. In one case,  the Ontario Superior Court dismissed a franchisee’s rescission claim since the franchisee had unlawfully abandoned its café business. As such, the court directed a master to quantify the franchisor’s damages resulting from the unlawful abandonment: New Vision Renaissance MX Ltd. v. The Symposium Café Inc., 2020 ONSC 1119. There are no further reported decisions in that matter that address how those damages were ultimately assessed.

As a general practice, franchisors should maintain detailed and documented records of any expenses that they incur related to the termination of a franchise agreement. As a proactive approach, franchisors may also wish to include wording in their standard form of franchise agreement that specifies entitlement to compensation of the costs associated with termination and the enforcement of their associated rights from the franchisee.

Post-Termination Rent Obligations

The lease arrangements between franchised businesses and landlords vary widely across franchise systems. In some cases, the franchisor leases from the landlord directly and then sub-leases the space to the franchisee. In other cases, the franchisee enters into a lease directly with the landlord under direction from, or with mandatory approval required by, the franchisor. The franchisor may be a guarantor under the lease, or the franchisor may even be the landlord. While the facts of the case may vary, there is often an open question as to what happens to the leased unit when a franchisee either abandons the premises or is terminated.

Franchisors should keep in mind that, generally, a tenant cannot unilaterally terminate a fixed-term commercial lease unless the lease provides them with such a right. Historically, where a tenant breached a fixed-term lease including by vacating its premises, the Supreme Court of Canada gave the landlord the options of accepting the repudiation and re-letting the premises, and claiming any arrears and/or shortfall against the tenant, or to instead “hold the tenant to the lease” with no duty of mitigation until the expiry of the lease term: Highway Properties Ltd. v. Kelly, Douglas and Co. Ltd., [1971 SCR 562].

More recently, courts have reconsidered the issue of whether the landlord should have the obligation to “mitigate” its damages upon the tenant’s repudiation of the lease. In a 2019 decision, an Alberta court cited academic commentary suggesting that this area is ripe for reform, noting that the court was “troubled by the idea that the law would permit a landlord to sit back and allow losses to accumulate, when the landlord through reasonable steps could avoid them”: Panther Sports v. Anderson, 2019 ABQB 973.

In a 2022 decision, the British Columbia Court of Appeal found that it remained bound by the Highway Properties decision, with the practical result that a landlord has the option to refuse to accept the tenant’s repudiation of a commercial lease and to insist on the payment of rent for the balance of the term: Anthem Crestpoint Tillicum Holdings v. HBC, 2022 BCCA 166.

In 2024, the Ontario Court of Appeal considered this issue in the Aphria case. It, too, determined that it was bound by the requirements of the Highway Properties case and that “the Landlord did not have a duty to mitigate in this case.” The Court of Appeal observed that “it is not for this court to change this law but for the Supreme Court or the Legislature to do so”: Canada Life Assurance Company v. Aphria Inc., 2024 ONCA 882. As such, the tenant has appealed to the Supreme Court of Canada. Its appeal was heard in February 2026, and the judgment is currently under reserve. At the hearing, the tenant’s counsel urged the Supreme Court not to preserve what the tenant described as an “exemption” to the general duty to mitigate for commercial landlords as this would encourage unreasonable behaviour to the detriment of commercial tenants.

For franchisors, the issue of mitigation in respect of post-repudiation commercial lease payments is an evolving area where careful consideration will need to be given to the Supreme Court of Canada’s forthcoming decision and the applicable provincial law.

Ongoing Payment Obligations After Termination or Abandonment

With respect to non-rent amounts due under the franchise agreement, if a franchisor terminates the agreement, such obligations may be extinguished and the franchisor may not be able to impose payments on the franchisee, absent agreement of the parties to the contrary.

However, where a franchisee unlawfully abandons its franchised business, the franchisor may be entitled to claim damages for breach of contract which aim to place the franchisor into the financial position that it would have occupied, had the franchisee performed the franchise agreement. This may require consideration of certain expenses that the franchisor avoided when the franchisee abandoned its premises, as well as the franchisor’s general duty to act reasonably to mitigate its damages.

Other Rights and Remedies

There may be further fact-specific contractual rights and remedies that warrant consideration – such as intellectual property, confidentiality, and non-competition protections – which go beyond the scope of this article. In the context of a non-competition obligation, the Ontario Superior Court has noted that “where a franchisor has a strong prima facie case that its franchisee has deliberately violated contractual prohibitions, the court should be more prepared to hold the franchisees to their bargain and less swayed by pleas to equity made by those who appear unwilling to do equity”: Home Instead v. 244674 Ontario Inc., 2015 ONSC 7630.

Conclusion

While franchise legislation is generally intended to protect franchisees, the cases above demonstrate that courts will still enforce and give effect to commercial agreements to the benefit of franchisors. Franchisors may consider raising these rights or remedies, either on their own or in response to a demand for payment from a departing franchisee.

There may be practical considerations to take into account in determining how aggressively to pursue these options, including the cost associated with litigation and whether the franchisee and its guarantors have sufficient assets to satisfy a judgment. Courts have made clear that franchisors must continue to comply with their statutory duty of good faith and fair dealing where obligations survive the end of a franchise agreement. Further, the potential obligation to disclose a litigation dispute as a “material fact” in the franchise disclosure document may weigh against taking too aggressive an approach.

In some instances, a franchisor may simply raise some of the potential legal rights and remedies discussed above as part of reaching a negotiated resolution. While pursuing formal enforcement procedures is not the only path forward, a franchisor should keep these options in mind when developing a strategy to deal with a departing franchisee.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.