Franchise Agreements Must Be Strong – But Are
They Always Fair?
However,
this being so, from time to time, franchise agreements
can include clauses which are not strictly necessary to
protect the system or which may go a little too far in
attempting to protect the franchise business. Sometimes
an agreement simply does not support the franchisee in
the way they might expect. Examples may include:
a)A Provision that any costs
involved in defending the use of the trade mark should
be met by the franchisee;
b) Immediate rights for the
franchisor to cancel without notice if the franchisee
happens to miss or delays payment of royalties;
c) Lack of clauses regarding
ongoing support, training and development of the
business by the franchisor;
d) Limitation of the franchisor's
liability to the franchisee even if the franchisor
breaches its obligations to the franchisee;
e) Widely-drafted clauses
undermining a franchisee's 'exclusive' territory in
unwarranted circumstances.
The
frequency of these sorts of clauses will often depend on
the drafting skills of the franchisor's lawyer, but any
experienced franchise lawyer commissioned by the
franchisee will be able to highlight them.
Once
identified, where to from here? Many franchisors adopt
the stance that they will not entertain any changes
whatsoever to the agreement. Often the franchisor will
want to have one form of agreement to ensure consistency
amongst all its franchisees. There is a commonly held
idea that once some amendments are agreed to, the
franchisor is opening the floodgates to future
franchisees' requests which could quickly become an
admin
istrative
nightmare. In some cases, the franchisor in
New
Zealand
may in fact be a master franchisor, tied in to an
overseas form of agreement and unable to make changes to
the
New
Zealand
agreements without extensive discussions with the
international franchisor. This is often an undesirable
and unsuccessful approach.
It
is vital, however, that resistance to change the
franchise agreement does not cause the franchisee to
ignore the need to understand the agreement. Too many
franchisees have become disgruntled because they have
not taken steps to read and appreciate each provision in
their franchise agreement, only to be dealt a nasty
shock some months later when they face a franchisor
legitimately taking steps to terminate the agreement.
From
the franchisee's perspective he or she must enter into
any franchise agreement with their eyes wide open and
fully aware of the risks that the agreement provides,
whether or not they or their lawyer is able to negotiate
any changes. For this reason, potential franchisees
should see a visit to a franchising lawyer as an
investment in the nature of insurance, and as part of
the risk management process of setting out in their new
business venture.
Buried In Paperwork?
The
franchise agreement is the basis of the contractual
arrangement entered into by the franchisee and
franchisor. However it usually is not as simple as one
document. In fact there can be many peripheral documents
of which the franchisee should be aware, including
disclosure documents, operations manuals and leases.
Many
of these documents are not even available to the
franchisee's lawyer before the franchisee is required to
sign. The franchisee may therefore be under a
responsibility to check these provisions out for him or
herself. It is vital to be familiar with these ancillary
documents as it is standard for franchise agreements to
contain a provision that if any one of them is breached,
it constitutes a breach of the franchise agreement
itself.
What Should The Term
Be?
A
franchise is generally granted for a finite period of
time - in other words, it is a licence for the
franchisee to use the trade mark, logo and other
'get-up' for a defined period. The term of the franchise
varies greatly between companies and depends on the
nature of the system.
The
term should be assessed against the capital input that
the franchisee is being required to invest. For
instance, the bigger the investment, generally the
longer the term as this gives the franchisee a greater
opportunity to cash in on his or her initial input. It
is likely that the costs of setting out on a lawn mowing
franchise would be significantly less than, say, a
franchised retail outlet which may include substantial
fit-out costs. Accordingly, the term of the retail
franchise might be longer.
Many
franchise agreements include a number of shorter terms
rather than one long term. It is important that the
franchisee appreciates that more often than not, the
'right of renewal' may in fact be a right in favour of
the franchisor. Most people understand that a right of
renewal in a lease sense is a right that can be
exercised by the tenant at his or her discretion.
However, in franchise situations, usually the franchisor
has the ultimate ability to veto the renewal if the
franchisee has not been performing to a standard which
is often not even defined at the outset.
For
this reason, franchisors tend to prefer shorter
franchise terms with several 'rights of renewal'. This
has other advantages for the franchisor - on a renewal,
the form of franchise agreement may be updated and in
some contracts, the franchisor can request a renewal
fee.
Leases
& Sub-Leases
Obviously
not all franchise systems require the franchisee to
lease premises - many franchisees are mobile or work
from home. Where third party premises are an issue,
franchisors can deal with leases in different ways. The
overriding principle for the franchisor is one of
control. Some franchisors exercise this control by
taking a lease directly from the landlord which they
will then sublease to the franchisee. Other franchisors
may require the franchisee to take the lease directly
from the landlord but ensure a provision is included
that if the franchisee breaches its lease obligations,
the franchisor can step in and remedy the problem. In
either case, the franchisor is ensuring that the
premises will operate according to the strict guidelines
of the system - again, so as not to bring the franchise
into disrepute.
One
issue that is often overlooked, however, is the need to
ensure the length of the franchise term coincides with
the length of the lease term. Many franchisees have
found themselves stuck in a 10 year lease only to find
that the franchise term only runs for six years. If the
franchise term is not renewed, the franchisee then has
the responsibility of subleasing or otherwise dealing
with its lease obligations for the remainder of the
lease term without the right to operate the franchise!
Termination
What
happens when the franchisee and franchisor part company,
either prematurely or at the expiry of the term?
Termination provisions should be looked at very
carefully as they are often points of contention. There
are frequent misunderstandings by franchisees as to what
happens at the end of a term. This does, in fact, vary
from one franchise system to another - in some cases the
franchisee will simply walk away in the same way that a
tenant walks away at the end of a lease term. Other
franchise systems include mechanisms for paying the
franchisee a figure calculated in reference to certain
factors.
However,
it should also be borne in mind that if the franchise is
operating well and the franchise relationship is a good
one, then it is likely that both franchisee and
franchisor will want to renew the agreement.
