Termination, Nonrenewal, and Transfer

AuthorJames Goniea and Jeffery Haff
Pages351-423
351
CHAPTER 5
Termination, Nonrenewal, and Transfer
James Goniea and Jeffery Haff
Contents
5-1. Introduction: The Importance of Establishing and Following
an Organized Compliance Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352
5-2. Dispute Resolution—Forms of Dispute Resolution . . . . . . . . . . . . . . . . . . 354
(a) Informal Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354
(b) Mediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355
(c) Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355
(d) Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356
5-3. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356
(a) How Potential Termination Situations Typically Arise . . . . . . . . . . . 356
(i) Financial Difficulties of the Franchisee . . . . . . . . . . . . . . . . . . . . 356
(ii) Disgruntled Franchisee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .357
(iii) Operational Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357
(b) How to Evaluate Potential Termination Situations . . . . . . . . . . . . . . . 358
(c) Contractual Bases for Termination of a Franchise Agreement . . . . . .359
(d) Statutory Restrictions on the Right to Terminate . . . . . . . . . . . . . . . . 363
(e) Has the Contract Been Modified? Examination of the Parties’
Course of Dealings and Subsequent Performance . . . . . . . . . . . . . . . . 364
(f) Analyze All Potential Bases for Claims by the Franchisee . . . . . . . . . 365
5-4. Nonrenewal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .367
(a) Differences between Nonrenewal and Termination . . . . . . . . . . . . . . 367
(b) Contractual Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368
(c) Statutory Restrictions on Nonrenewal . . . . . . . . . . . . . . . . . . . . . . . . . 369
(d) Additional Legal Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370
(e) Analyze All Bases for Potential Claims by the Franchisee . . . . . . . . . 371
5-5. Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372
(a) Transfer by the Franchisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372
(b) Transfer by the Franchisee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372
(i) Transfer for the Convenience of Ownership . . . . . . . . . . . . . . . . 372
(ii) Transfer as a Work-Out Option . . . . . . . . . . . . . . . . . . . . . . . . . . . 373
(iii) Transfer as an Early Exit Option . . . . . . . . . . . . . . . . . . . . . . . . . 373
(iv) Transfer Due to Changes in the Effective Control
of an Entity Franchisee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373
(v) Transfer as a Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . 373
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352 Franchise Law Compliance Manual
(vi) Transfer Due to Death or Disability . . . . . . . . . . . . . . . . . . . . . . . 374
(vii) Transfer Due to Offering by Franchisee . . . . . . . . . . . . . . . . . . . . 374
(viii) Transfer to a Family Member . . . . . . . . . . . . . . . . . . . . . . . . . . . 374
(ix) Transfers Due to Offers by Third Parties . . . . . . . . . . . . . . . . . . . 374
(c) Contractual Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374
(i) Personal Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374
(ii) Transfers Defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .375
(iii) Transfer Subject to Franchisor’s Prior Written Consent . . . . . . . 375
(iv) Conditions for Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .376
(v) Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377
(d) Statutory Restrictions on the Franchisor’s Right to
Approve or Disapprove a Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378
(e) Common Law Restrictions on a Franchisor’s Approval
or Disapproval of a Transfer Request . . . . . . . . . . . . . . . . . . . . . . . . . . 380
5-6. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .381
Appendix 5-1: Summary of State Franchise Relationship Laws
regarding Termination and Nonrenewal . . . . . . . . . . . . . . . . . . . . . . . . . . 387
Checklist 5-1: Default and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
Checklist 5-2: Nonrenewal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .401
Checklist 5-3: Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .402
Exhibit 5-1: Sample Mediation Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403
Form 5-1: Notice of Termination for Financial Default . . . . . . . . . . . . . . . . . . . 404
Form 5-2: Notice of Termination for Operational Default . . . . . . . . . . . . . . . . . 406
Form 5-3: Notice of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408
Form 5-4: Voluntary Termination of Franchise Agreement between
[Franchisor] and [Franchisee] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .410
Form 5-5: Letter Agreement of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413
Form 5-6: Reinstatement of Franchise Agreement between [Franchisor]
and [Franchisee] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416
Form 5-7: Transfer and Release Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418
Form 5-7A: Guaranty and Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421
Form 5-7B: Scope of Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423
5-1. Introduction: The Importance
of Establishing and Following
an Organized Compliance Program
A franchisor’s ability to enforce its contractual rights and policies with respect to
its franchisees depends, for both legal and practical reasons, upon the develop-
ment of reasonable standards and procedures and upon the consistent enforce-
ment of those standards and procedures throughout the franchise system.
Developing and consistently following such a compliance program is particularly
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Chapter 5 Termination, Nonrenewal, and Transfer 353
important in the areas of termination, nonrenewal, and transfer. Decisions in
these areas affect who will be presenting the franchisor’s concept and image to
the public and how it will be presented. Moreover, decisions regarding termina-
tion, nonrenewal, and transfer most fundamentally affect the rights and interests
of franchisees, and so these decisions therefore constitute the most fertile ground
for disputes and litigation.
This chapter will provide guidelines to assist a franchisor to develop and
implement procedures for termination, nonrenewal, and transfer that are (1) con-
sistent with the defined business objectives of the franchisor; (2) fair and reason-
able in the context of the franchisor/franchisee relationship; (3) consistently
applied to all similarly situated franchisees; and, (4) most likely to avoid litiga-
tion concerning the franchisor’s decisions in these areas or, if litigation occurs,
best position the franchisor to prevail in any such dispute.
The development and implementation of a compliance program involves four
fundamental steps. First, the franchisor decides what forms of dispute resolution
to use. Second, the franchisor must determine what issues are most important
with respect to its particular business and franchise system, and it then must
establish its policies and procedures in accordance with and in furtherance of
these particular business objectives. Third, the franchisor must communicate its
policies, procedures, and standards clearly and regularly to its own personnel as
well as to all of its franchisees so that there can be no reasonable dispute over
what the particular policy is and whether the franchisee was aware of that policy.
Fourth, the franchisor must monitor and apply its policies, procedures, and stan-
dards diligently and consistently throughout its franchise system, particularly to
similarly situated franchisees.
The obvious goal of a compliance program is to further the business objec-
tives of the franchise system while avoiding, wherever possible, disputes and
franchisee litigation. If a franchisor finds itself in litigation, however, a well-
developed and properly implemented compliance program can serve as both a
sword and a shield to protect the franchisor’s legitimate business interests. For
example, reasonable and consistently applied procedures leading up to the termi-
nation of a franchise can be powerful evidence in an injunction action by a fran-
chisor against a franchisee that contests or otherwise refuses to acknowledge that
termination. Evidence that a franchisor consistently followed not only the black-
letter contractual requirements but also its reasonable policies and procedures
can help defeat a franchisee’s claim for wrongful termination under most contrac-
tual or tort theories. The ultimate goal of establishing and consistently following
a reasonable compliance program in these areas is to show that regardless of the
legal standard that might be applied, the franchisor acted fairly, reasonably, and
consistent with the parties’ legitimate contractual expectations.
This chapter is intended to provide practical guidance for franchisors to use
in establishing or evaluating their own compliance programs in the areas of ter-
mination, nonrenewal, and transfer. It deals first with an overview of dispute
resolution procedures. It then moves on to termination, which is probably the
most fertile ground for problems and disputes because termination often results
in a forfeiture of the franchisee’s rights and interests. It then addresses nonrenewal
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