BY DAVID S KAYE, CLAIRMONTS, SOLICITORS

The decision is made and you have done the important background research on the Franchise that you have selected and the System involved. You have spoken to several other Franchisees, arranged the funding and booked a date to commence the Training Programme.

All that is left is to sign on the dotted line of a fairly large legal document called a “Franchise Agreement” and your new Business will be up and running. Who needs legal advice when you can simply put pen to paper and start making some serious money?

This approach is one that is adopted by many Franchisees and, regrettably, many only consult a solicitor for the first time once they have hit a problem, preferring not to pay a relatively small fee to understand what they are committing to and the potential downside involved. So what can a solicitor do for a Franchisee and just what is this Franchise Agreement about and why is it so important?

The Franchise Agreement (which often runs to 40/50 pages) regulates the relationship between the Franchisor and the Franchisee regarding the operation of the System that the Franchisor has developed and which it requires to be carefully followed to ensure that the Business is operated uniformly across the Business:- after all that is an important part of what makes the Franchise Business successful.

A solicitor will explain what is contained in the Agreement, including the pitfalls, and what will happen to the Franchisee if he fails to observe the terms.

The Manual details how the System operates on a day to day basis and a prospective Franchisee should make every effort to read a copy before signing the Agreement to understand what the day to day running of the Business entails.

The Agreement is more general than the Manual, detailing what each party must do to make the relationship successful, which is their obligations to each other and the Agreement supersedes any of the Franchisor’s literature, projections or statements made once it has been signed.

You are spending a lot of money in purchasing a Franchise and it is therefore important to know and understand the rules that apply to the operation of the Business which are detailed in the Agreement.

Some Franchisors require a deposit (which is often refundable) to reserve the Territory for the Franchisee whilst a property is located (if one is necessary). This is usually refunded after an agreed period of around 6 months if a property has not been located unless the parties agree to extend the period. The Franchisee can also be asked to sign a Confidentiality Agreement to ensure that the Franchisor is protected against confidential information being divulged to a third party.

The Franchise Agreement will detail the Initial Fee and the Royalty (sometimes called a Management Fee) which is payable together with any contribution towards Advertising (around 1-2% of Gross Turnover).

The Agreement will also contain a Right of Renewal following expiry of the Initial Term (which is commonly 5 or 10 years) and will detail the conditions to be met by the Franchisee to secure the option to renew. In some circumstances, a Renewal Fee requires to be paid and the Franchisor requires to serve notice often between 3 and 6 months before the end of the initial term. It is imperative that the notice is properly served and the way to do so will be detailed in a special clause entitled “Notices” towards the end of the Agreement. Failing proper service, a notice could be invalid and in the case of a renewal notice, result in the Franchisee losing the opportunity to renew the Term.

The Franchisor’s Obligations will be set out and are usually few and far between and often quite vague. The Franchisee should ensure that anything that is required of the Franchisor either before trading commences or thereafter, is documented within this section of the Agreement.

On the other hand there are many detailed clauses in the Agreement outlining what the Franchisee must do to run the Business in accordance with the System and the directions of the Franchisor. These are called The Franchisee’s Obligations!

Failure to do so can lead to termination of the Agreement and there will be a detailed Termination Clause highlighting various examples where a Franchisor can terminate the Agreement such as a material breach by the Franchisee or failure to pay sums on time.

A Franchising solicitor will recommend numerous revisals to the Franchisee which are likely to be accepted by the Franchisor in a personal Side Letter and which give the Franchisee a degree of protection against the Franchisor acting unreasonably.

The Franchisor will usually allow a number of these revisals provided they are not material points which will not alter the crux of the Franchise Agreement itself. Although most Franchisors will state at the outset that the Agreement itself is non-negotiable, they are usually willing to accept a personal Side Letter covering such points.

The Franchise Agreement will also regulate what happens in the event of the Franchisee wanting to sell the Business and usually the Franchisor has the right to buy back the Business at the same price as any other offer that has been made provided he agrees to do so within a set period (around 30 days). If the Franchisor does not want to buy the Business back on these terms then the prospective purchaser must, nonetheless, comply with the Franchisor’s standards and required criteria and satisfactorily complete Training.

The Agreement will also cover what happens to the Business upon the death of the Franchisee or if the Franchisee is unable to run the Business through incapacity.

A Franchise solicitor will often propose revisals that make the Agreement more “user friendly” and the relationship more balanced between the Franchisor and the Franchisee. He will point out the worst scenario to a Franchisee advising the Franchisee to weigh up these consideration alongside the commercial benefits that the Franchise Business promises.

One Scottish aspect of a Franchise Agreement to consider is in relation to Property where the system of buying and selling is very different. In Scotland an offer and acceptance letters are exchanged until a binding contract is entered into. Gazumping does not really occur because the contract is often agreed some time before the transfer of the property takes place whilst in England, exchange of contracts happens often at the same time as settlement.

Having the Agreement written subject to Scottish Law and governed by the Scottish Courts will avoid a Franchisee based in Scotland having to engage an English lawyer and traveling to Courts in England which is likely to be a far more expensive experience.

Most Franchise solicitors will prepare a report on a Franchise Agreement and meet the Franchisee to discuss this in detail for a fixed fee which is usually around £400-£500 + VAT.

David S Kaye (BFA Affiliate)
Clairmonts Solicitors
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