| Licensing, Technology Transfers, |
System protection protocols are layered and diverse. They are mostly, but not entirely, in the franchise agreement. Covenants to keep confidential the elements of the franchise system that have been taught to the franchisee, and to protect the operations manual are typical of these. Covenants not to compete are included as part of the system protection protocols. But covenants not to compete are not enforceable in some states, and even where they are enforceable, courts try to find ways and reasons to deny their enforceability. Even in states where they are enforceable, one needs to overlay them with site control covenants.
Over the years franchisors have used various site control provisions, some to their benefit and many to their extreme detriment. Illustratively, when the mid-west United States went through an incredible recession for several years in the mid and late 1970s, shopping malls and free standing retailers went broke in wholesale lots. Anything near an auto plant was doomed if it sold anything other than the absolute necessities of life or cold beer. Franchisors who were using sub-leasing as their site control mechanism found themselves with prime tenant liability to landlords for dozens, and sometimes hundreds, of leases on locations abandoned by franchisees who had been chewed up by the recession. Since, in most states, a commercial property landlord has no duty to mitigate his damages by going out and finding another tenant (and these locations were functionally unrentable in the circumstances), franchisors using sub-leasing as their site control device lost millions just in rent they had to pay, not to mention lost royalties.
Since humans learn only through tragedy, sub-leasing became persona non-grata among franchisors.
In the normal situation, outside the cataclysmic economic failure of an entire region of the country, it is not the under-performing franchisee who is likely to try to take his sign down and continue in business at the same location as an independent. If he can't make money as a franchisee, he probably (though not always) isn't going to be able to make it as an independent either. The greatest risk of defection, strange as it may seem, comes among the more successful of one's franchisees at the end of their franchise term, when the issue of renewal comes up.
Most franchise agreements provide that, upon renewal, the renewing franchisee must sign the agreement that is being used with new franchisees, even though that may contain quite different terms, such as higher royalties, less territorial protection and somewhat different upgrading of facilities obligations, to name just a few. Looking at that situation, the expiring term successful franchisee faces great temptation to defect. Oddly enough, these arise in clusters. Successful franchisees who joined the system together will all be looking at this dilemma at about the same time. Should one succeed in non-renewing and remaining in business as an independent and keep his location, the rest will defect also. It becomes of critical strategic importance that the first really good location remain in the system and becomes renewed. Litigation to enforce post expiration covenants is not just about the one defecting, non renewing franchisee, but also about all those standing in the wings watching the outcome and deciding what they are going to do when it is their turn. If all you have going for you is a covenant not to compete, your risk of losing that kind of franchisee is very high. That's a litigation risk they will always take, and, if they are properly advised, they will initiate litigation substantially before the expiration of their term so that the question is resolved before their franchise agreements run out.
Here is the answer to that problem. It also does not saddle a franchisor with bad location landlord liability.
Your franchise agreement should provide that location approval is required by the franchisor before any location can be chosen by the franchisee. It should also say that lease agreements on a franchise location must be pre-approved by the franchisor, AND that the landlord must be willing to accept the following language inserted into the lease at its signing: 'Landlord hereby consents to assumption of this lease, as tenant, by [Franchisor] in the event of any breach by Tenant, any termination of the lease or any change of Tenant's business identity or franchise affiliation.'
Your franchise agreement needs also to provide that any termination or expiration without renewal of the franchise agreement automatically constitutes an assignment by the franchisee of his leasehold rights to the franchisor. Hopefully, you made sure when he signed up in the first place that the franchisee and the tenant are the same entity. In the less usual situation, where the franchisee owns, rather than leases, the property, you should require him, as owner, to lease the property to a company he owns and have that company be the franchisee with the person guaranteeing performance.
Obviously, you have to disclose this specifically in your UFOC in the appropriate place(s). And, just as obviously, your own lawyer will have to add several more sentences to this provision to be absolutely certain that it is less clear. But, after all, isn't that what lawyers are for in the first place?
Copyright 1997 - 2008 || Richard A. Solomon
|| Site Map
||
||
 | Licensing, Technology Transfers, |