Franchise Agreement III

Transfer I

The franchisor will usually retain the right to transfer the benefit of the agreement so that it is available for its assignees. The franchisee’s  rights are unlikely to be freely transferable. It may have acknowledged that the franchisor has relied on the personnel, character, financial and business ability, etc. of the franchisee.

An assignment may arise voluntarily or involuntarily. It may include a sale or assignment, the grant of a mortgage, merger, consolidation, and the reconstruction of a corporate franchisee. Delegation and the outsourcing of operations are potentially transfers.

Where a transfer is permissible or unavoidable, the franchisor is likely to require at a minimum, to be satisfied in relation to the character and capacity of the proposed transferee.

Transfer II

The franchisee may require the consent of the franchisor to sell or transfer the business or any interest in the business. It may be that the consent is not to be unreasonably withheld. There may be provisions providing for consent on condition that there is compliance with certain conditions and the ongoing terms of the agreement.

In the case of a development agreement, the franchise agreement may give the franchisor significant control over the development of the network. It may wish to have the power of veto over the franchisees, sub-franchisees and the developer. The sale by the franchisee or developer of its business or the company to a third party may require the consent of the franchisor.

There may be provision for the succession on the death of the franchisees. The franchisor may agree not to exercise the right to pre-emption of the franchise beneficiary is suitable in accordance with the objective criteria.

Sale of the Franchisee’s Interest

A buyer of a franchise or development business or company will require extensive information. It will need to understand the nature of the franchise and the elements that sustain the value of the business. It may wish to know that the nature of the secrets and confidential information, which sustain the business and the robustness of their legal protection.

The extent of the agreement, the unexpired term, the fees and other sums payable, of how pilots have performed will be critical. Price, fees and future financial obligations must be fully tested, budgeted and priced.

Conditions of a permitted transfer (where permissible at all) are likely to include payment of any outstanding fees in full;

• up-to-date compliance with reports and statements;
• compliance with the terms of the agreement on an ongoing basis;
• satisfactory evidence of the transferee’s capacity to assume and comply with the agreement;
• sufficient information to allow the franchisor to vouch and verify the relevant matter
• evidence of transferee’s business aptitude, financial qualifications, the alackof connection with a competitor business,

A guarantee may be required from the transferor or another, such as the corporate’s owners or controllers.

Consent Process

A fee may be payable to the franchisor for dealing with the application. A fee or premium may be payable by the outgoing franchisee, as part of the consideration.

The franchisor may have a period during which to approve or disapprove a proposed transferee. The franchisor may have a right of first refusal with a right to purchase on the same terms as the proposed transferee during a period, which must first expire before completion of an approved transfer to a third party.

The franchisor will wish to assess the assignee / incoming management, in terms of financial status, reputation, ability to pay franchise fees and its ability generally to perform the obligations. It may wish to ensure that the assignee / incoming management is compatible with the maintenance of the brand and in particular, that it is not and is not connected to an incompatible or even competing business.

The assignment clause may provide for the refusal of consent and it may give the franchisor a pre-emption right in the event of a sale.  The franchisor may be entitled to a part of the price paid on the assignment as part of the commercial terms of the deal of the franchise agreement.

Termination I

The agreement will provide for termination for cause or otherwise. The agreement will expire in accordance with its natural term unless earlier terminated for breach or in other circumstances in which a right of termination arises.

The franchisor may be entitled to terminate for certain occasions of a serious breach or prolonged minor breaches. Examples of grounds for termination include

• governmental approvals are not forthcoming;
• the franchisee purports to make an assignment or transfer in violation of the agreement;
• the franchisee or its controllers are permanently incapacitated
• the franchisee or its controllers are guilty of serious offences which may affect the goodwill of the franchise;
• breach of intellectual property rights, including the wrongful assertion of ownership;
• breach of the confidentiality obligations;
• the franchisee becomes insolvent;
• serious breach of terms of the agreements;
• fails to pay sums due within a set period after written notice;
• fails to comply with any development quota;
• fails to comply with the other provisions of the agreement having given a certain period of notice.

Termination II

The franchise agreement is subject to termination in the usual way if either party becomes bankrupt, subject to insolvency, repeatedly breaks its agreement or fails to remedy serious breaches.

Certain obligations will arise on termination. Intellectual property must be given back or decommissioned. There will be restrictions on the franchisee purporting to hold itself out as the franchise business. There will generally be confidentiality obligations in relation to information held by the franchisee.

The franchisor may have the option to repurchase the franchisee’s interest in certain circumstances.  The purchase price may be based on a percentage of gross sales a recent period. It may apply to termination or expiration of the agreement.

Restrictions

The franchisee will be restricted from engaging in a business which competes with the franchisee’s business before and, perhaps for a period after termination.  It is likely that the franchisee will be restricted from assisting in or procuring third parties to engage in competition with the franchisor.

There are likely to be restrictions prohibiting the franchisee from competing with the franchisor for a certain period after termination, directly or indirectly. They would generally be justifiable in order to protect the franchisor’s intellectual property.

The sub-franchisee may not compete nor may its shareholders or directors, family members, partners directly or indirectly have an interest in a competing business or provide services in a competing business and divert any business from, or solicit employees or former employees.

This provision may be too wide, insufficiently tailored to the need to protect goodwill under the restrictions of trade doctrine, and Competition Acts.  If the restrictions are overbroad, and more than reasonably necessary to protect the franchisor’s legitimate interests they are likely to be void.

References and Sources

The Encylodaedia of Forms and Precedents Vol 16(4)