USA Trends and Developments Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison D. Marzocco, Rosen Karol Salis, PLLC
Lease Protection In the event that a franchisee defaults on its lease for the franchised premises, the franchisor wants to ensure that it does not “lose the location” as part of its franchise system. To prevent this from happening, franchisors seek to contract their right to assume (take over) a franchisee’s lease under these circumstances. Franchisors achieve this by requiring their franchisees, and their landlords for the anticipated demised prem - ises, to enter into the franchisor’s form of “Collateral Lease Assignment” and “Lease Rider”. Counsel for the franchisee may seek to negotiate certain terms of these agreements. Typical provisions include: • providing the franchisor with “step-in rights” to allow it to “take over”, even temporarily, the opera - tions of the franchisee’s location; • a pre-agreed landlord’s consent to a lease assign - ment to the franchisor or its affiliate; or • the right for the franchisor to cure any defaults under the lease by the franchisee. Dispute Resolution All franchise agreements need to have procedures in place to resolve disputes with franchisees. Many franchise agreements provide that, before the fran - chisor or franchisee can commence a court litigation or arbitration proceeding, the parties must engage in good faith negotiations and, if they do not resolve the dispute, non-binding mediation where a neutral attor - ney with experience in franchise law seeks to facilitate a settlement. Some franchise agreements require that disputes be determined by a judge in a public court litigation (which typically permits the parties to engage in a significant amount of “discovery”), while others require that disputes be determined by an arbitra - tor (usually a franchise attorney or former judge) in a private and confidential arbitration process (which usually permits more limited “discovery” by the par - ties), and where the parties may be required to pay the arbitrator’s fees in advance for the time that the arbitrator spends handling the case; the successful party in the case is reimbursed for its attorney’s fees by the unsuccessful party. Brand Protection In order to expand its franchise system, a franchisor must be able to protect its brand. A franchisor accom -
plishes this by requiring its franchisees to sign various agreements, including confidentiality and non-disclo - sure agreements, together with non-competition and non-solicitation agreements. Successful franchisors remain vigilant in protecting their confidential and proprietary information – including, for example, IP (trade marks), operations manuals, customer lists and related information – from unauthorised use or disclo - sure by their franchisees. Choice of Location A franchisee’s choice of the retail location from which it will operate is a critically important decision. While a franchisee’s success will ultimately depend on many factors, the selection of a quality location is close to the top of the list. Franchisors typically require their franchisees to submit site selection information to the franchisor, and the franchisee is required to obtain the franchisor’s approval with respect to the selected location prior to moving forward and negotiating a lease. Lease Negotiation Commercial leases are drafted by landlord’s counsel and are typically drafted to strongly benefit the land - lord. Franchisees are well served by retaining knowl - edgeable real estate counsel to review the proposed lease and seeking to negotiate a variety of key provi - sions, including, without limitation: • what, if any, lease guaranty will be required; • the term of the lease and options to renew the lease, along with insuring co-ordination of the tim - ing between the expiry of the lease and the fran - chise agreement; and • transfer and assignment-related provisions. Lease Guaranties When a franchisee seeks to purchase a franchise and enter into a commercial lease for the location from which it will operate the franchised business, the principal(s) typically form(s) a new single purpose entity, sometimes with minimal assets, which will enter into both the franchise agreement and lease. Accord - ingly, most landlords require a franchisee/prospective tenant to provide a lease guaranty, most often (but not always) from a principal of the tenant, as an induce - ment for the landlord to enter into the lease. From
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