FRANCHISOR 101:   COURT CHIPS AWAY AT "CHOICE OF LAW" CLAUSE

If you're like many franchisors, it may have been years since you gave a moment's thought to the "choice-of-law" provision in your standard franchise agreement. Such provisions are essential elements of any franchise agreement, but they can make for hard reading.

If you operate in California, however, don't let too much time pass before you read over your own choice-of-law provision, because a recent ruling by the California Court of Appeal raises the possibility that it doesn't do what you want it to.

At issue in the California case, 1-800-GOT JUNK? LLC vs. Millennium Asset Recovery, Inc., was whether the franchisor could apply California law, not Washington law as specified in its franchise agreement, in terminating a franchisee for failure to pay royalties.

The first wrinkle in this case is the fact that the franchisee wanted Washington franchise law to apply even though the franchisee operated in California. Why? Because Washington law is more liberal than California law in protecting the rights of franchisees facing termination.

The second wrinkle is that the franchisor, based in Vancouver, Canada, wanted to apply California law in terminating the franchisee despite the fact that the franchise agreement specified that Washington law would apply. Why? Because the franchisor wanted to get on with business, and even though California law generally favors franchisees in disputes with franchisors, it tips the balance in favor of franchisors by streamlining the procedures they must follow in terminating franchisees.

The California Court of Appeal ruled in favor of the franchisee on grounds that, no matter what the franchise agreement's choice-of-law provision said, it did not offend California public policy to allow the franchisee to fight termination under the more liberal provisions of Washington law.

If this sounds abstruse, it is, but it's important for franchisors operating in California, because the case shows that if you get into a pushing and pulling contest with a franchisee fighting termination, you may find yourself arguing your case in accordance with the laws of some other state, not California, no matter what your choice-of-law provision say.

Indeed, some states go farther than others in protecting the rights of franchisees, but you want your choice-of-law provisions to govern what happens when you need to terminate a franchisee.

FRANCHISEE 101 - HOW TO AVOID MISSTEPS IN NEGOTIATING A LEASE

Among the reams of intimidating legal documents you must sign on your way to becoming a franchisee, the lease on the premises you will occupy is second in importance only to the franchise agreement itself, and it deserves at least as much study. Why? Because you have state franchise law to protect you in dealing with your franchisor, but in negotiating a lease, you're on your own, and a bad lease can spell disaster to your venture.

In fact, you can expect the lease agreement your landlord gives you to contain a number of clauses that can trip you up. Here are three to look out for, along with what to do about them:

The "beginning work" and "open for business" dates: Your lease will specify a date by which you must begin work to prepare the premises for your franchise, along with a date by which you must open for business. Give yourself plenty of time here, taking into account the delays inevitable in any construction job. If you miss these deadlines, the lease may give your landlord the right to terminate the lease and bill you for any work done by the landlord. Worse yet, the lease may give your landlord the right to jack up the rent due as of your opening date at a rate substantially higher than the minimum called for in the lease and may require you to pay rent before you open for business.

The "permitted use" clause: Take care here, too. As crafted by your landlord, the lease will probably require that you get the landlord's approval for any changes, however minor, in the business uses to which you put the premises. What you want is broad language permitting you to make changes that do not conflict with 1) the original theme or idea of your enterprise or 2) the "exclusive use" rights of another tenant in the same location.

"Affiliated" businesses: Your lease may also prevent you or any "affiliated entities or persons" from operating a business like yours within a certain distance of your leased premises. To be sure, your landlord wants you to succeed and won't embrace any enterprise that might threaten the revenue stream generated by your enterprise, including any expansion outlet under your own direction that might divert your customers to another location. You, on the other hand, may have long-range expansion plans in mind. If so, make sure they don't threaten your landlord's economic interest in your current enterprise. For that matter, consider letting your landlord know about your plans in a confidential memo so you can negotiate a reasonable accord.

Next newsletter: Three more things to watch out for in your lease agreement - basic and percentage rent charges, records and audits, and certified financial statements.