and non-use of the franchisor’s information and materials.
Sample 1 is an example of a deposit agreement. It contains a few interesting errors.
Sample 1: Deposit Agreement (Ontario)
Emma & Jeremy’s Internet Café & Donut Emporium Ltd.
DEPOSIT AGREEMENT (Ontario Only)
1. The Applicant, _________________, hereby makes application to be considered for an Emma & Jeremy’s franchise with the Franchisor, Emma & Jeremy’s Internet Café & Donut Emporium Ltd. upon substantially the same terms and conditions as are set forth below and such other terms and conditions as are generally contained in the Franchisor’s standard form of Franchise Agreement.
2. The Applicant understands that prior to executing the Franchise Agreement, the Franchisor may furnish information and material that will be of a confidential nature concerning the Franchisor and the franchise system including, without limitation, the contents of the Franchise Agreement, the Franchisor’s operations and other manuals, and the Franchisor’s training and other materials (the “Confidential Information”). The Applicant acknowledges that the Confidential Information is the property of the Franchisor and that —
(a) it will not make or allow to be made copies of all or any part of the Confidential Information;
(b) it will not publish or allow to be published all or any part of the Confidential Information;
(c) it will not disclose or allow to be disclosed to any person, firm, or corporation, directly or indirectly, the contents of all or any part of the Confidential Information;
(d) it will not retain all or any part of the Confidential Information and will return all of the Confidential Information to the Franchisor on demand;
(e) it will not make any use of all or any part of the Confidential Information for its own purposes or for any purpose other than pursuant to an agreement reached with the Franchisor, and will keep and respect the confidentiality of the Confidential Information for so long as all or any part thereof shall remain confidential to the Franchisor;
(f) it will not carry on any business similar to the franchised business in the event that the parties do not enter into a franchise agreement
3. The Applicant encloses herewith a deposit in the amount of $10,000. It is understood that if the Franchise Agreement is entered into between the Franchisor and the Applicant, such amount will be credited towards payment of the initial franchise fee without interest or deduction.
4. Upon receipt of notice of acceptance of this Application from the Franchisor, the Applicant shall have ten ( 5 ) days in which to enter into the Franchise Agreement with the Franchisor, and pay the balance of the initial franchise fee of $30,000. In the event that the Applicant fails to enter into the Franchise Agreement and pay the balance of the initial franchise fee within the above-mentioned time period, the Applicant understands and agrees that the deposit referred to in paragraph 3 hereof will be returned within a reasonable period of time to the Applicant with a reasonable set off for the Franchisor’s administrative expenses.
5. If the Franchisor fails to accept this Application within ten ( 10 days of the date hereof, the Applicant understands that the deposit referred to in paragraph 3 hereof will be returned within a reasonable period of time to the Applicant with a reasonable set off for the Franchisor’s administrative expenses.
6. The Applicant understands that the acceptance by the Franchisor of a deposit from the Applicant is no guarantee that the Applicant will be granted an Emma & Jeremy’s franchise, and that the Franchisor may reject this application for any reason whatsoever.
DATED at the City of Toronto, in the Province of Ontario, this 5 day of October, 20—.
____________________________
Applicant (Signature)
____________________________
(Print Name)
____________________________
Witness (Signature)
____________________________
(Print Name)
________________________________________________________
Emma & Jeremy’s Internet Café & Donut Emporium Ltd. hereby acknowledges the foregoing together with the receipt of the amount of the deposit referred to above and agrees to consider the Applicant as a candidate for an Emma & Jeremy’s franchise.
DATED at the City of Toronto, in the Province of Ontario, this 5 day of October, 20—.
Emma & Jeremy’s Internet Café & Donut Emporium Ltd.
Per:________________________
* * *
Note that Sample 1 says the franchisee is in the province of Ontario. If this deposit agreement were actually entered with a franchisee for a location in the province of Ontario before the delivery of a disclosure document and the expiry of the 14-day cooling off period mandated under the Arthur Wishart Act (Franchise Disclosure), 2000, the statute would be breached and the franchisor may well have opened itself up to liability. Franchisors who grant franchises to franchisees in Ontario must not have the franchisee sign any agreement relating to the franchise, or take any money from the prospective franchisee prior to disclosure having been made in accordance with the Act and the expiry of the 14-day cooling off period.
As noted earlier, in Alberta, a deposit agreement is permitted, but the deposit must be refundable, must only contain provisions respecting confidentiality, and must be for no more than 20 percent of the franchisor’s initial franchise fee. In the other common-law provinces, there are no similar requirements concerning deposits, so “buyer beware.”
Note that the franchisor in this sample is entitled to retain some of the deposit monies to compensate it for administrative expenses (see paragraph 4 of Sample 1). If this happens in your deposit agreement, you need to ask yourself the following questions:
• How much is the deposit?
• When will the deposit be returned if the transaction fails to complete? (In Sample 1, the deposit agreement does not say.)
• Will it take a year before the deposit is returned?
Sometimes franchisors will legitimately want the right to deduct a portion of the deposit to pay for some of its expenses (e.g., location-related and design costs that have been incurred). That’s a business decision you must make. If you are going to agree to that, then fix a dollar amount that you can live with and you are prepared to agree is non-refundable. You should fix a time period in which the money will be returned (i.e., five days from written notice).
What
