Outline franchise agreement
In association with Lloyds TSB
Main Headings and Notes
This has been derived from an agreement intended for use by a company acting as franchisor and wishing to enter into a formal agreement with an individual or a partnership as a franchisee.
The original agreement was developed by Wragge & Co LLP, solicitors based in Birmingham. The notes have been prepared by an associate in the firm, Vicky Wilkes. It should be noted that the exact wording in any agreement will be strongly influenced by the circumstances of the given franchise system.
This is only a specimen and prospective franchisors should seek independent legal advice from a lawyer experienced in franchising.
Clause headings:
1. Definitions
2. Grant of the franchise
3. Duration of this Agreement
4. Renewal of this Agreement
5. Payment
6. What the Company must do
7. Intellectual property, trade marks
8. Records and accounts
9. Equipment and products
10. Control of standards and training
11. What the franchisee must do
12. Marketing, advertising and promotion
13. Insurance and vehicle formalities
14. Improvements
15. Force majeure
16. What happens if the franchisee wants to sell the business
17. What happens if the franchisee is ill, becomes physically or mentally incapacitated or dies
18. Termination of the Agreement
19. What happens after termination
20. Restrictions after termination
21. Partnership and agency
22. Waiver
23. Incorporation
24. Entire Agreement
25. Independent advice
26. Notices
27. Severance
28. Law and jurisdiction
29. Set-off
30. Block Exemption and Schedules
1. Definitions
Contains descriptions and meanings of important expressions, such as the ‘advertising fund’, ‘franchise fee’, ‘intellectual property’, ‘know-how’, ‘marketing materials’, ‘management services fee’, ‘premises’, ‘operations manual’, ‘territory’ and ‘training’.
Also, ‘Substantial Term’ means a term or condition of the agreement which is listed in an appended schedule and which is considered to be of particular significance.
2. Grant of the Franchise
This additionally notes that an exclusive territory is not being granted to the franchisee (should the franchisor later ‘reasonably consider’ that a single franchisee cannot service the given territory, then the franchisor has the right to reduce the size of that territory). The franchisee may not sub-franchise or use the premises for other purposes without prior consent.
3. Duration of this Agreement
An initial term might be five years, with one or more options to renew for a similar period if certain conditions are met (see Renewal of this Agreement below). The provisions for termination are set out later in the agreement.
4. Renewal of this Agreement
Requires careful drafting not only to permit the removal of recalcitrant franchisees, but also to provide an incentive to renew for those who comply substantially with the agreement. The BFA’s code of ethics provides that no fee should be paid on renewal.
5. Payment
An initial fee is usually payable on or before signature of the agreement. It is intended to cover the franchisor’s costs of providing initial training, equipment etc. to the franchisee. There is also an ongoing management services fee and there may also be payments towards advertising funds. Also specified will be the steps that the franchisor will be allowed to take in the event of late payment by the franchisee.
6. What the Company [franchisor] must do
The franchisor’s obligations are described so that the franchisee can assess what support he or she will get. An active interest in the franchisee, by the franchisor, should be to the benefit of both parties. It commits the franchisor to provide the initial and subsequent training, and also to supply an operations manual. Marketing support is to be supplied as the franchisor thinks appropriate, but franchisee requests for such support will be met only at the franchisee’s expense. The franchisor may provide national and/or local advertising either at its own cost or from franchisees’ contributions to an advertising fund. Alternatively, the franchisee may be responsible for all local advertising at its own cost.
7. Intellectual Property, Trade Marks
An important section, setting out the franchisor’s intellectual property rights and the licensing of the same to the franchisee. The franchisee is not to infringe these rights – for example, by trading using a ‘confusingly similar name’ – and he/she must acknowledge the confidentiality of the operations manual and any associated ‘know-how’.
8. Records and Accounts
The main purposes of this section are to determine the operating efficiency of the outlet and to deter/detect fraud. This will require the franchisee to maintain ‘full and accurate’ records, and also to provide the franchisor with regular management accounts and a copy of any VAT returns submitted by the franchisee to H.M. Customs & Excise.
9. Equipment and Products
The franchisor may require the franchise to purchase goods and services from nominated suppliers, but the use of alternative suppliers of at least a comparable standard and cost may be permitted, at the franchisor’s discretion. The franchisee is required to purchase or lease additional equipment as the franchisor considers reasonably necessary. Inspections of the franchisee’s operation by the franchisor are permitted at any time, without notice. Minimum prices to customers are to be recommended, but not set, by the franchisor. In the case of ‘national account customers’, franchisors may oblige the franchisee to offer goods or services on no less favourable terms than those the franchisor has agreed with such national account customers. The franchisor may oblige the franchisee not to exceed prices it has agreed with ‘national account customers’.
10. Control of Standards and Training
As one of crucial importance, this section is considered to be a ‘substantial term of the agreement’, whereby a failure to comply can lead to the franchisee being removed.
The franchisee must comply with all of the procedures set out in the operations manual. Premises must be kept clean and tidy, and often refurbishment and alterations reasonably stipulated by the franchisor are to be made at the franchisee’s expense. Employees of the franchisee failing to maintain the requisite standards must be dismissed, at the expense of the franchisee. Failure by the franchisee to reach the minimum standards necessary to successfully complete the initial training programme results in the franchisor having the right to terminate the franchise agreement, however, the franchisee will usually receive a predetermined part-refund of fees. Changes to the nature of the business, introduced by the franchisor and requiring additional franchisee training, will be provided at the franchisor’s expense (but will not cover ‘out-of-pocket’ expenses, such as salaries, travelling or accommodation). All ‘material’ customer complaints are to be notified to the franchisor who may reserve the right to intervene and deal with a customer direct. Inventory (equipment) and stock checks are to be conducted at a specified frequency.
11. What the Franchisee must do
The franchisee’s main obligations are noted here, including a requirement to comply with the operations manual. He/she must “devote whatever time and attention to the franchise business as is
