Legal matters

The franchise agreement is probably the most important document in the franchise process. Once signed it is binding. Nicola Broadhurst reveals why you must seek legal advice before you sign

You would not buy a house without a survey so why buy a franchise, which sometimes involves significantinvestment without getting it reviewed by a solicito?. Even where the agreement has been issued as a ‘non-negotiable’ agreement it is still worth getting it checked if just for the comfort of knowing that you are signing with your eyes wide open.

When choosing a solicitor it is tempting to simply choose a local firm or perhaps  family solicitor, but unless they have specifi experience of franchising, the agreement is likely to come as a shock to them and you will probably be advised not to sign. This is because most franchise agreements are one-sided and weighted heavily in favour of the franchisor with no specific exit oute for the franchisee other than through a sale of the business. In addition the agreement will contain numerous obligations on the part of the franchisee. This coupled with the fact that the franchise agreement is  often issued as a non-negotiable document distinguishes it from many other commercial agreements and, to the inexperienced eye, seems highly unreasonable.

A solicitor with franchise experience and particularly those affiliated to the Britis Franchise Association (bfa) will be familiar with the provisions of franchise agreements and more importantly what is considered best practice and therefore ethical franchising under the bfa’s guide to the code of ethics. In the absence of franchise specific legislation in the UK the bfas guide assumes the role of a moral code for ethical and fair behaviour. The key principle of the bfa’s code of ethics is fair practice between franchisors and franchisees. Therefore any franchisor that is committed to franchising professionally should be prepared to pay heed to the guide whether or not they wish to be a member of the bfa.

The solicitor’s job should be to advise a prospective franchisee on the main provisions of the agreement, highlighting what is standard practice and what is not, and to spot glaring omissions and  provisions that go too far to be considered ethical. If there are issues arising out of the review these should always be raised with the franchisor, regardless of whether the franchise agreement is stated to be  non-negotiable. The franchisor’s reaction to valid points raised can often be telling in itself, providing a clear indication of  how they will react to disagreements in the future. What is irritating for a franchisor is where issues are raised as a result of ill informed legal advice and hefty legal costs are incurred in educating the solicitor and his client.

Some of the key points that a solicitor should consider are:

1 Grant of rights: what rights are being granted and whether these are exclusive or non-exclusive.

2 Term: the duration of the agreement, which must be long enough for the franchisee to recover his investment and make a profit – typically five year

3 Renewal:is there a right to renew? If so, are the conditions to obtaining renewal fair? These usually include: bringing the business up to the latest standards, signing the latest form of franchise agreement (which may contain higher fees and different terms) and paying the franchisor’s costs. These should be capped if possible. Any renewal fees must be reasonable and not present an obstacle to renewal.

4 Franchisor’s obligations: the level of initial and continuing support being provided by the franchisor. This must justify the fees being charged.

5 Franchisee’s obligations: the scope and nature of the obligations detailing the way in which the  business should be run.

6 Right to sell: does the franchisee have the right to sell the business  and if so what conditions are imposed on this right? It is usual for the franchisor’s consent to be obtained and certain conditions satisfied befoe a franchisee can sell, including: not being in breach, approval of purchaser by the franchisor, payment of the franchisor’s expenses and costs of training the purchaser, and typically a further commission payment where the franchisor has introduced the purchaser. Most franchisors also include a right of first efusal.

7 Death and incapacity: does the agreement provide a period of time within which the business can be sold or a beneficiary chosen by the franchise to be nominated to take over the business in the event of the permanent incapacity or death of the franchisee? This is important as it allows the franchisee or his estate  the opportunity to realise some value  from the business in what can be a very difficult time.

8 Termination: as most termination clauses only allow the franchisor to terminate for the franchisee’s breach, the list of defaults which justify termination must be reviewed to ensure they are reasonable.

9 Non-compete: the agreement usually includes non-compete provisions to stop franchisees competing with the franchisor, its other franchisees, or poaching employees or customers both during the agreement and for a period of time afterwards. These restrictions need to  be reasonable.

10 Operations manual: The franchisor’s operations manual contains the detailed information on operating the business. It is usually incorporated into the agreement and has contractual force. As a franchisor can amend the manual imposing changes  on the franchisee without consent, the agreement must state that in the event of a conflict the ageement overrides to avoid abuse by the franchisor.

There are many other areas of the agreement, which need to be considered and expert advice should be taken. The risk of getting it wrong at a later date must surely outweigh the financia expenditure required for the advice.

Nicola Broadhurst  is a partner in Stevens & Bolton. 
For more information email nicola.broadhurst@stevens-bolton.com

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