Legal Updates

The enhanced data disclosure duty of a franchisor may not arise when the franchisee checked the property aforehand

October 13, 2020

A franchisee and a franchisor entered into an agreement for the operation of a café a yet to be built commercial center. Prior to the execution of the agreement the franchisee checked the asset but when two years lapsed and the construction of the commercial center has not yet been completed, the franchisee demanded the cancellation of the agreement.
The Court held that despite the enhanced disclosure obligations imposed on franchisors towards franchisees, because the franchisee checked the asset aforehand, it may not cancel it. One of the methods created in the world of franchising to protect the franchisor against the franchisee's conduct is an economic guarantee mechanism, according to which the franchisor is the holder the real estate rights, and the franchisee is the tenant. Due to economic power differences, enhanced disclosure obligations are imposed on the franchisor vis-à-vis the franchisee. This obligation requires full disclosure of the data as to the real estate, including as to planning and permits and ensuring that the franchisee understood the information provided to it. Nevertheless, franchise agreements, as any business model, entail different risks of both the franchisee and the franchisor. Here, despite the increased disclosure obligations, because the franchisee received the data aforehand and even checked the asset prior to entering into the agreement, it is not entitled to cancel the agreement even if after a few years the building of the commercial center has not yet finished and it cannot commence operation.