USA Trends and Developments Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison D. Marzocco, Rosen Karol Salis, PLLC
The right to close the business in the event of sustained losses Franchise agreements often do not provide the fran - chisee with an exit strategy if the business fails. It is worth seeking to negotiate a contractual right to close a business in the event of losses, but, understandably, this should be subject to certain limitations (eg, losses in the form of calendar quarters in excess of “x” per quarter or, cumulatively, losses in the form of consec - utive calendar quarters in excess of “x” per quarter). Restrictive covenants The length and geographic scope of non-competition and non-solicitation clauses should be reasonably drawn to reflect the actual market size. For example, a city-wide or multi-mile restriction makes less sense in a dense urban territory than in a rural one, and a shorter, narrower restrictive period is a reasonable counterproposal to an exceedingly long one. Dispute resolution Generally, arbitration is the favoured method of dispute resolution in franchise agreements. Notwithstanding this norm, it is beneficial for both parties to first use negotiation and then mediation to resolve their dis - putes, as these forms of alternate dispute resolution will be cost-saving and give the parties opportunities to resolve their dispute(s) before diving into costly and time-consuming arbitration or litigation. Franchisees should also make sure that a mutual “fee shifting” pro - vision is in the franchise agreement, as this incentiv - ises each of the parties to seek to resolve their dispute rather than to engage in a costly fight. Structuring multi-unit deals A franchisee developing more than one location should consider negotiating a single form of adden - dum with consistent, favourable terms applied across all of the individual franchise agreements, rather than being bound contractually by the franchisor’s “then- current form of franchise agreement” and negotiating each one separately. While these requests are reasonable, a franchisor’s willingness to engage in negotiation varies by brand and market.
than being required to sign the franchisor’s then-cur - rent and potentially less favourable form of franchise
agreement on renewal. Personal guarantees
A full guaranty of every obligation under the agree - ment – sometimes required from both the franchise owner and, often, a non-owner spouse – should if possible be negotiated to a limited guaranty, tied only to the ongoing financial obligations of the franchise and post-termination covenants. Transfer rights Franchise agreements typically include “rights of first refusal” on a sale, which can discourage third-party buyers, as they risk losing the deal at the last min - ute after investing time and money. A “right of first purchase”, where the deal is presented to the fran - chisor before it is marketed, is more favourable to a seller. For succession (and estate planning) purposes, the franchisee should also seek an exception from typical franchisor consent requirements (and rights of first refusal) when the franchisee’s principal desires to transfer its interests in the franchise to spouses, family members or trusts in favour of family members. Default, termination and cross defaults Franchisees should carefully negotiate these provi - sions, including: • an exception to standard cure periods for breaches of a nature that genuinely cannot be fixed within the stated window, so long as the franchisee is “diligently” working towards a resolution; and • a reasonable requirement with respect to how frequently a non-compliance issue must occur, or how material non-compliance must be to trigger the ultimate remedy of termination. For developers of multi-unit locations, franchisees/ developers should seek a limit on the cross-default rights of the franchisor (where a default at one unit may jeopardise all units) to certain, egregious con - duct.
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