Barry Kurtz dark logoFranchise First and Foremost
January 2010
16000 Ventura Boulevard
Suite 1000
Encino, CA  91436
818-728-9979

FRANCHISOR 101:  THE CASE OF THE ERRANT SPOUSE

As a franchisor, do you have the right to terminate a franchise agreement if one of your franchisees gets into trouble with the law?
 
It seems a settled question that you do; after all, the typical franchise agreement and many state laws give the franchisor the right to end the relationship if the franchisee "is convicted of a felony or any other criminal misconduct which is relevant to the operation of the franchise."
 
But a recent Florida court case suggests that franchisors might do well to revise their agreements to specify that, where there are two or more co-franchisees involved, errant conduct on the part of one can cause the others to lose out, too.
 
A Florida woman had called the matter into question on grounds that it was her husband, not the woman herself, whose arrest and conviction on child pornography charges had led the franchisor in the case to terminate a franchise agreement signed by both spouses.
 
The woman argued the franchisor had been well within its rights to terminate the husband as a franchisee but not her. She herself had engaged in no misconduct, her suit argued, so the franchisor's termination of the franchise agreement constituted a breach of contract and unjust enrichment.
 
No deal, the trial court ruled. Florida law holds partners in any business arrangement jointly and severally liable for the obligations of the partnership, and the couple's franchise agreement set out no exceptions to that rule. The franchise agreement thus bound both spouses, the court ruled, and the franchisor had done nothing wrong in terminating it.
 
To be sure, the Florida ruling comes down squarely on the side of franchisors. But franchise laws differ from state to state, and in a litigious age, the case does not free franchisors elsewhere from the threat of similar litigation from the determined spouse or partner of an errant franchisee.
 
A risk foreseen, however, is a risk provided for - in this case with contract language making it clear that as a franchisor, you retain the right to terminate a franchise agreement if any co-franchisee runs afoul of the law in such manner as to bring your operations into disrepute.

FRANCHISEE 101:  NEGOTIATING A LEASE

If you think signing a franchise agreement is hard on the nerves, wait till you have to talk with a landlord about a lease.

Why? Because the terms of your lease can spell success or failure as easily as your franchise agreement can, and in negotiating a lease you won't have the protection of state and federal franchise law to keep you from harm.

Put another way, next to the franchise agreement itself, your lease is the most important legal agreement you will sign as a fledgling franchisee - and fraught with danger, since a bad lease can send you to the poorhouse in short order no matter how good a franchisee you are.

Which is not to say it's impossible to get things right with a lease so long as you understand that your landlord has the upper hand and it's up to you to look out for yourself.

Here are five things to look out for:
  • Condition of the premises: Most lease agreements require tenants to accept the premises "as is," meaning you have no recourse if, for example, you discover mold in the walls of your premises after you open up for business. To protect yourself, you want to make your lease contingent on the results of a professional inspection before you take possession. You also want the landlord to warrant that the premises conforms to all applicable building codes and such laws as the Americans with Disabilities Act.

  • Commencement Date for Payment of Rent: Most leases call for the payment of rent when the lease is signed or within a specified period of time after lease execution. Negotiate to defer the payment of rent until you open for business or as close to the scheduled opening date as possible.

  • Options to Extend Term and Expansion Rights: You expect to succeed, right? Obtain the right to extend the initial term of the lease for successive periods of time to coincide with your extension rights in your franchise agreement on the same terms and conditions originally included in your lease, with the exception of your rent, which will generally always increase. Success could also mean you'll need more room, so you want language in your lease giving you an option, or at least a right of first refusal, to lease adjacent space.
  • Options to Terminate Lease: You may fail, right? A possible, but not likely, way to protect yourself is to obtain an option to terminate the lease if your gross revenue does not exceed a designated amount within, say, the first 2 - 3 years of the lease term.
  • Covenant of quiet enjoyment: In essence, a covenant of quiet enjoyment guarantees that claims against your landlord - for example, a foreclosure action or a mechanic's lien - won't affect your lease. If you find a covenant of quiet enjoyment in the lease your landlord hands you, well and good. If not, insist on adding one.
  • Entire agreement: This is boilerplate in virtually any legal contract. Its importance is that it frees the landlord from living up to any promises made verbally but not included in the lease agreement. Put another way, nothing your landlord promises to do for you means a thing if it doesn't end up in the lease agreement.
Other pitfalls await the unwary fledgling franchisee in negotiating a lease. We'll cover them in future newsletters.

Peggy Karavanich, paralegal
Our Team -
Focus on Peggy Karavanich

Peggy Karavanich has held her Certified Legal Assistant designation since August 1999, and is an experienced franchise, intellectual property and corporate paralegal. Peggy joined the firm in October 2006 and assists clients in franchise registration and compliance and corporate matters.

Peggy serves on the Board of Directors of the Orange County Paralegal Association and is a member of the National Association of Legal Assistants and California Association of Paralegals.

This communication published by Barry Kurtz, APC is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation.

Copyright � Barry Kurtz, A Professional Corporation 2009 
All Rights Reserved.

 
In This Issue
Franchisor 101: The Case of the Errant Spouse
Franchisee 101: Negotiating a Lease
Our Team - Peggy Karavanich
Contributing Expert - Richard Rosenberg
Quick Links
Contributing Expert

Richard Rosenberg,
Ballard Rosenberg Golper & Savitt, LLP

Employer COBRA Subsidy Extended

Barry Kurtz
Barry Kurtz is a prolific writer on the subject of franchise law. From due diligence to franchise appraisal, his articles are a valuable resource to any franchisee and franchisor.  He was recently named a Certified Specialist in Franchise and Distribution Law by the State Bar of California Board of Legal Specialization.



Visit our website for more articles
16000 Ventura Boulevard, Suite 1000
Encino, CA 91436
818-728-9979

www.barrykurtzpc.com
[email protected]