Business Law Notes

ACQUIRING A FANCHISE: THE AGREEMENTS

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The following is part of a series of short articles to assist individuals and companies who are contemplating franchising their business.

The franchise relationship is generally governed by legislation if the franchise is located in Alberta, Ontario or Prince Edward Island, A franchisee purchasing a retail franchise is normally required to execute a franchise agreement, a sublease, and a general security agreement. In the case of home-based or some service-based franchises, subleases and general security agreements may not be required. In hotel or other franchises where the franchisee is the owner of the real estate, again, the sublease will not be required.

Franchisors generally do not want to make changes to their documents. Asking for a large number of changes on behalf of your client may result in the franchisor refusing to deal with any of them. This may not be a case with a new or small franchise system with few units. There may be some room to negotiate where the franchise agreement has not been tested by an experienced franchise lawyer on the other side. Changes are rarely granted in the larger systems where they have a line-up of franchisees who are willing to sign the agreement in the form that it is in. That being said, the obligation of the solicitor is to review the agreements and to ensure that the client understands them. In the event that the client is not willing to live with the terms of the agreement, then the client should to advised that it should not proceed rather than spending a lot of time trying to negotiate an acceptable agreement.

In well drafted agreements, cross-default provisions exist between each of the franchise documents so that a default under one of the documents is deemed a default under each of the others. The sublease document will be used in the case of a termination to allow the sub-landlord, usually the franchisor or its affiliate, to re-enter and take possession of a terminated franchisee pursuant to landlord and tenant laws. It is the main instrument by which a franchisor enforces its remedies upon default of any of the franchise documents.

The franchisor often requires a general security agreement covering the assets of the franchisee. It is important to ensure that the franchisor is agreeable to subordinating its general security interest to the bank or other primary lender to the purchaser. Without such a covenant, it may be very difficult for the franchisee to obtain financing to complete the transaction. It is standard practice in the industry for the franchisor to register its interest under the PPSA after the primary lender has registered.

Editor: 416-368-0582

Updated: November, 2006