How do Different Franchisors Handle Various Standard Franchise Agreement Provisions?

By: Brad Smith, Franchise Attorney
 
Franchise agreements can vary as greatly as the industries that employ the franchising model. However, most agreements share general themes. Depending on the specific terms and details, differing "standard" provisions can lead to stark differences in the franchise relationship.
 
Transfer


Most franchise agreements allow a franchisee to sell or "transfer" the franchise to a new owner. Nearly all agreements require franchisor approval of the proposed transfer. The more complex franchise agreement establishes a complicated approval process and a laundry list of items to be accomplished before transfer. A standard franchise agreement requires the franchisor's approval of the transfer and of the new owner, refurbishment of the franchise premises, and payment of a transfer fee. The transfer fee can range from reimbursement of the franchisor's out-of-pocket costs to payment for the new owner's training to half the initial fee to the entire initial fee.
 
A reasonable transfer provision permits franchisee's family members and new partners to join the franchise business, authorizes continuation of the business in the event of death or disability, and includes a reasonable fee that does not discourage transfers.
 
Some agreements give the franchisor a right of first refusal to the franchise or territory. Under a right of first refusal, the franchisee must give the franchisor the opportunity to buy the franchise at the same price as offered by a third party. The franchisor generally has 30-60 days to decide. A right of first refusal may chill the interest of the potential third party buyer. To counter this "chilling effect", some agreements also contain a right of first purchase, through which the franchisee must first solicit an offer from the franchisor. If there is no offer made or if the franchisee does not like the offer, he can solicit third-party offers. The franchisee cannot sell to a third party for a price lower than the franchisor's offer.
 
Termination


Most franchise agreements give the franchisor 30 to 90 days to cure any alleged breaches before a franchisee can terminate. However, some agreements are silent on whether a franchisee can terminate and what recourse is available if the franchisor does default. (Regardless, a franchisee can always sue for breach of contract).
 
On the other hand, most agreements give the franchisee 30 days (or fewer) to cure any alleged defaults before the franchisor can terminate. The time difference between a franchisee's cure period and the franchisor's cure period may be justifiable, depending on the character of the franchise system. Some agreements, but not many, provide an illustrative list of conduct or omissions that constitute a default. Some agreements deem a default cured as long as the franchisee has begun substantial and continuing action to cure the default.
 
Most franchise agreements list defaults or causes that trigger automatic and immediate termination. Common "triggers" include franchise application misrepresentations, bankruptcy/insolvency, voluntary franchise abandonment, felony convictions, and repeated defaults within a defined period (even if cured). Other triggers may include late or understated financial reports, failure to comply with regulations after warning/notice, failure to pay fees after notice (generally 5-7 days), creating imminent danger to public health/safety, failure to keep confidential information secret, and attempting to repudiate the franchise agreement by conduct or threats.
 
Renewal


Some agreements enable the franchisor to arbitrarily refuse to renew an agreement upon expiration. Some agreements limit the number of times for renewal (i.e., one or two additional terms). More commonly (and fairly), the agreement allows renewal upon satisfying certain conditions. These conditions may include prior notice of intent to renew, refurbishment of the franchise premises, payment of a renewal fee, etc. Renewal fees can range from nothing to reimbursement of franchisor's out-of-pocket costs to a flat fee ($5,000-$10,000 range) to the entire initial fee.
 
Non-compete
 
In addition to confidentiality and non-disclosure protections, most franchise agreements have "in-term" non-compete covenants. These generally prohibit the franchisee from participating in any similar business during the agreement's term. In-term non-competes commonly apply anywhere, but some have geographic limitations (within # miles of the franchise premises, etc). "Similar business" definitions can vary. Some include specific and enumerated goods and services, some to a specific item ("sub-sandwich"), others to a broad good or services ("food"), others refer vaguely to similarity.
 
Some agreement have "post-term" non-compete covenants. These provisions prohibit the franchisee from participating in similar business within a certain geographic area and for a set period, after the agreement terminates/expires. Distance and time limitations vary widely, but generally fall within 1 to 2 years after termination/expiration and within a 10 to 100 mile radius of the franchise premises. Some non-compete geographic limitations include distances from other outlets in the system or political boundaries (within the United States or the state of ______).
 
Other significant provisions affect the franchise relationship and success. Contact competent franchise counsel to review disclosure and agreement documentation regarding: fees, territorial rights, training, quotas, dispute resolution, trademark usage, advertising, product source requirements, reporting, and state laws that affect the franchise relationship.