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The Fundamental Aspects of the Franchise Agreement: Part 9

Written by : Joseph Adler


The franchise agreement may simply expire at the end of the initial term or, if applicable, at the end of the renewal term. In addition, the franchise agreement sets out certain events of default by the franchisee which may form the basis of an early termination of the agreement by the franchisor. Certain events of default may be cured by the franchisee
  • i.e., failure to pay royalty fees, failure to file required reports), whereas others may result in the immediate termination of the franchise agreement
  • i.e., bankruptcy or insolvency of the franchisee, abandonment of the franchise). Even in the case of a curable default, most franchise agreements will provide the franchisor with a further ground of termination where the franchisee has received a specified number of notices of defaults within a certain period of time
  • whether or not such defaults have been cured by the franchisee).

    It is common for franchisor's to reserve the right to terminate the franchise agreement at the very early stages of the relationship in the event the franchisee fails to demonstrate the qualities and abilities deemed necessary for the successful operation of the franchised business or the franchisee fails to complete the initial training program to the satisfaction of the franchisor, acting reasonably. Where the agreement is terminated at this early stage, the franchisor will often refund the initial franchise fee less its reasonable administrative, supervisory, accounting, training and legal costs.

    Most franchise agreements will also include a cross-default provision which enables the franchisor to terminate all agreements between the franchisor
  • or its affiliate) and the franchisee in the event of a default by the franchisee under any one agreement. For example, the agreements may be drafted such that a failure to pay rent owing under the sublease agreement is deemed to be a default under the franchise agreement as well, thereby allowing the franchisor to terminate both the sublease and the franchise agreement. The franchise agreement will also set out the franchisee's obligations upon the termination or expiration of the agreement.

    A sample list of post-termination obligations of the franchisee is set out below:

  • pay to the franchisor and its affiliates all amounts owing under the franchise agreement or any other agreement between the franchisee and the franchisor or any such affiliates;
  • return to the franchisor all copies of the operations manual;

  • notify the telephone company and all listing agencies of the termination or expiration of the franchisee's right to use all telephone numbers and all classified and other directory listings of the franchised business and that any telephone numbers of the franchised business have been assigned to the franchisor and, at the franchisor's option, assign such telephone numbers to the franchisor;
  • assign all Internet and website addresses, e-mail addresses and domain names using the franchisor's trademarks to the franchisor;

  • cease to operate the franchised business under the franchisor's system or otherwise and thereafter not, directly or indirectly, represent to the public that such franchised business is operated in association with the franchisor's system, or hold himself or herself out as a present or former franchisee of the franchisor;

  • cease to use, directly or indirectly, in advertising or in any other manner whatever the franchisor's trade-marks, any name or mark similar to the trade–marks, any other identifying characteristics or indicia of operation of the franchisor's system, and any confidential standards, methods, procedures and specifications associated with the franchisor's system;

  • take all such action as may be necessary to cancel any trade or business name registration which contains any part of the trade-marks;

  • permit the franchisor to enter the franchisee's premises and remove any and all personal property of the franchisor and any and all personal property of the franchisee which displays the franchisor's trade-marks or any distinctive feature or device associated with the franchisor's system;

  • comply with the franchisee's post-termination obligations of confidentiality and non-competition (see further discussion below).

  • Perhaps not surprisingly, the franchise agreement will not typically contain many provisions dealing with the franchisor's post-termination obligations. In many cases, however, the franchise agreement will provide the franchisor with an option to purchase some or all of the assets used by the franchisee in the operation of the franchised business based on a predetermined formula. For example, the franchisor may want the option to purchase all or part of the franchisee's leasehold improvements, inventory, branded products or materials, furniture, fixtures, equipment or other assets used in connection with the operation of the franchised business. Such a provision is usually structured as a right or an option, as opposed to an obligation to buy back part or all of the assets.
    A sample option to purchase provision is provided below:

    portion of the equipment, moveable leasehold improvements, furniture, fixtures, inventories and other assets located on the Premises or otherwise held by Franchisee in connection with the Franchised Business, such option to be exercised by Notice delivered to Franchisee within thirty

  • 30) days of the date of the termination or expiration of this Agreement for any reason whatsoever. The purchase price payable to Franchisee for any

    such inventories shall be the lower of their cost or net realizable value, lesss a re-stocking charge equal to twenty-five percent

  • 25%) of such purchase price. The purchase price payable to Franchisee for any such equipment, moveable leasehold improvements, furniture, fixtures and other assets shall be their fair market value as determined by Franchisor's auditors

  • but not allowing for any amount for goodwill). Any purchase and sale completed by Franchisor pursuant to this Section shall be completed in accordance with all applicable bulk sales legislation.

    Transfer and Assignment

    The franchise agreement should contain specific provisions dealing with the transferability and assignability of the agreement and the parties' respective rights and obligations under the agreement. Typically, there are no restrictions on the franchisor's ability to assign the franchise agreement. The franchise agreement, however, will usually restrict the franchisee's ability to assign the agreement and its rights and obligations under the agreement unless certain conditions are met. These restrictions are due, in part, to the fact that the franchisor's decision to grant the franchise in the first place was based on factors that are specific to the franchisee's qualifications to operate the business. As a result, the grant of rights is typically acknowledged by the parties to be personal to the franchisee.

    The franchisee's ability to sell, assign, transfer or mortgage or otherwise dispose of its interest under the franchise agreement will usually be subject to obtaining the prior written consent of the franchisor. In addition, the franchisor may impose certain conditions which must be satisfied before the franchisor will grant its consent. For example, the franchisor may require that the proposed transferee be acceptable to the franchisor and have completed all necessary training, that the existing franchisee be in full compliance with all of its obligations under the franchisee agreement and any related agreements and have executed a complete release of the franchisor from all of its obligations under the franchise agreement, payment of any applicable transfer fee, and that the transferee enter into the franchisor's then-current from of franchise agreement. The franchise agreement may also provide the franchisor with a right of first refusal where the franchisee has received a third party offer to purchase the franchise. Specifically, the agreement may require the franchisee to present every firm third party offer to the franchisor, together with information on the specific terms and conditions of such offer. The franchisor then has a specified period of time within which to decide whether or not to purchase the franchise on the same terms and conditions as set out in the third party offer. The agreement should also specify that where the franchisor elects not to purchase the franchise, the proposed transferee remains subject to the same standard approval process for all transfers and that the transfer remains subject to the franchisor's prior written consent.
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