When a Franchise Ends: Goodwill, Secured Debt and More Lessons From Chooch’s

Introduction

What happens when a struggling franchisee exits the system and leaves its debt behind?

In 2572966 Ontario Inc. et al v. Chooch’s Inc. et al., 2026 ONSC 3790, Justice Valente of the Ontario Superior Court of Justice determined that the answer depends on the bargain the parties actually made, not the bargain one party later says it made, and ultimately rejected an attempt to require a franchisor to assume a former franchisee’s substantial secured debt through a voluntary surrender.

Justice Valente’s decision in Chooch’s serves as an important reminder that courts are reluctant to rewrite the commercial bargain struck between franchisors and franchisees. In dismissing most of the franchisee’s claims, Justice Valente reaffirmed two important principles of Canadian franchise law:

1. a franchisor does not breach its duty of fair dealing simply by enforcing system standards; and
2. franchise exit arrangements will be interpreted in light of the franchise agreement governing the parties’ relationship.

The Facts

The dispute in question arose after a “Wings Up!” franchisee faced significant operational difficulties. Over several months, the franchisor conducted multiple audits, issued a series of default notices and ultimately worked with the franchisee to pursue a sale of the business. When a proposed purchaser was identified, the parties entered into a voluntary surrender agreement. Under the terms of the agreement, the franchisee surrendered its franchise rights, and the franchisor assumed control of the location.

However, the surrender did not resolve the parties’ dispute. The franchisee alleged, among other things, that the franchisor had breached the franchise agreement and its duty of fair dealing, improperly pressured the franchisee to surrender the business and wrongfully assumed control of the franchise assets.

A Franchisor Is Entitled to Enforce System Standards

The franchisee argued that the franchisor had failed to provide adequate training and had used repeated notices of default and the threat of termination to pressure it into surrendering the business. Justice Valente rejected these arguments, including the allegation that the franchisor had breached its statutory duty of fair dealing by acting in bad faith.

His Honour found that the franchisee had waived the in-store training provided for in the franchise agreement and that the franchisor’s concerns were supported by a pattern of operational failures, including poor audit scores, food safety issues, sanitation deficiencies, delinquent royalty payments and the temporary closure of the restaurant. In Justice Valente’s view, the franchisor acted fairly and in accordance with reasonable commercial standards by repeatedly auditing the franchise, issuing notices of default, visiting the restaurant to address deficiencies and working with the franchisee to find a purchaser.

Not All Goodwill Is Created Equal

A key issue in the case was the meaning of “franchise assets” in the voluntary surrender agreement. The franchisee argued that the term included the location’s local goodwill and therefore required the franchisor to satisfy more than $235,000 in secured debt. Justice Valente disagreed.

His Honour noted that brand goodwill belonged to the franchisor and that local goodwill could belong to a franchisee, concluding that the parties did not intend local goodwill to form part of the assets acquired under the surrender arrangement. In reaching that conclusion, Justice Valente relied on the franchise agreement, which excluded goodwill from any purchase price payable by the franchisor on termination.

The decision reinforces that franchise exit arrangements do not exist in isolation. Courts will interpret surrender agreements against the backdrop of the franchise agreement and the commercial realities that gave rise to them. Here, Justice Valente found that it would have been commercially unreasonable to conclude that the franchisor had agreed to assume more than $235,000 in debt in exchange for assets connected to a business being sold for substantially less.

Justice Valente’s treatment of the franchisee’s secured creditor is also noteworthy. The franchisee’s primary secured creditor, who was also the mother of the franchisee’s principal, argued that the franchisor had wrongfully dealt with secured equipment, fixtures and other tangible assets after taking control of the restaurant. Although Justice Valente rejected the argument that the franchisor was required to satisfy the franchisee’s entire secured indebtedness, he found that the franchisor had disposed of assets that were subject to the creditor’s security interest and was liable for conversion, awarding $25,000 in damages. Importantly, however, Justice Valente rejected the secured creditor’s claim to the value of any local goodwill, finding that the franchise had ceased operating and that any such goodwill no longer had value.

Taken together, Chooch’s confirms that courts will not rewrite the parties’ commercial bargain after the fact. It also highlights the importance of considering the rights of secured creditors when franchise assets are transferred as part of an exit arrangement.

Key Takeaways

• A franchisor should diligently document a franchisee’s operational deficiencies, including by way of issuing proper default notices.
• A franchisor should act to protect system standards and brand integrity, provided it does so with honesty and in accordance with reasonable commercial standards.
• A franchisor should ensure that a voluntary surrender agreement clearly defines the assets being transferred and expressly addresses whether any local goodwill forms part of the transaction.

The Franchising Group at Aird & Berlis LLP advises franchisors on regulatory compliance, disclosure obligations and resale transactions. For guidance on your franchise, please contact the authors or a member of the group.