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.
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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.
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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.
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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.
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Contributing Expert
Richard Rosenberg, Ballard Rosenberg Golper & Savitt, LLP
Employer COBRA Subsidy Extended
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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
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