Many franchisors, of both new brands and established systems, are happy to work with franchisees to revise certain provisions of the franchise agreement. The higher the risk associated with the brand, the more likely the franchisor will be willing to play ball. For example, if the system is brand new in Canada and the franchisor is looking to expand, the franchisor will often make concessions in an effort to alleviate the risk due to the inability of prospective franchisees to perform substantial due diligence.
Aside from the typical business terms, during the age of COVID-19 there are additional considerations to be aware of when negotiating the franchise agreement. A few of these considerations are outlined below.
Commencement Dates, Deadlines
For franchise systems that require franchisees to have a bricks and mortar location, the franchise agreement will typically provide for requisite timelines by which the franchisee must find a location, have same approved by the franchisor and execute a lease agreement for the location. Additionally, many franchise agreements will provide for deadlines by which the buildout/construction of the premises is to be completed. It is important to consider whether, during this time, these deadlines are realistic. Alternatively, the commencement date of the agreement could commence after the COVID-19 restrictions have been lifted, so that the clock starts running at a time when these obligations can be performed.
Royalties
Be aware of whether the royalty to be paid throughout the term is a fixed amount or a percentage of gross sales. If the royalty is a fixed amount, the franchisee will need to pay this amount regardless of whether any revenue was generated during the month or week, as applicable. During this time, franchisors may not be able to provide a complete royalty break, however they may be willing to provide for a ramp up of royalties which would provide for a graduated royalty amount that would increase over time until the total royalty payment is reached. For example, if the agreement called for a 4% royalty, the royalty would increase by 1% each month until month 4, at which point the 4% royalty would apply for the balance of the term.
Performance Criteria
Some systems implement minimum performance criteria which must be maintained throughout the term. Such performance criteria often provide the franchisor with certain rights, including the right to reduce the territory, take back the territory and/or terminate the franchise agreement altogether. During this era, it is important to have an honest discussion with the franchisor and other franchisees to determine whether such criteria will be attainable during any period of recovery after quarantine is lifted. The franchisor may be willing to delay the commencement of the performance criteria requirement to such point as a certain level of revenue is realized for a number of months in a row.
Force Majeure Provisions
A force majeure provision recognizes that certain events are outside the control of the parties and excuses them from the performance of certain obligations for the period of disruption or delay resulting from these events. Franchisees should ensure that such provisions are mutual (they apply to the obligations of both the franchisor and franchisee), and that they include more than general “Acts of God”, by expressly including pandemics, quarantine, health related emergency and/or government required closures.
Joanne Gilbert-Wiens is an associate in the Franchise, Retail and Distribution group. She can be contacted at jgilbert@kmblaw.com for further information about franchising.
Aside from the typical business terms, during the age of COVID-19 there are additional considerations to be aware of when negotiating the franchise agreement. A few of these considerations are outlined below.
Commencement Dates, Deadlines
For franchise systems that require franchisees to have a bricks and mortar location, the franchise agreement will typically provide for requisite timelines by which the franchisee must find a location, have same approved by the franchisor and execute a lease agreement for the location. Additionally, many franchise agreements will provide for deadlines by which the buildout/construction of the premises is to be completed. It is important to consider whether, during this time, these deadlines are realistic. Alternatively, the commencement date of the agreement could commence after the COVID-19 restrictions have been lifted, so that the clock starts running at a time when these obligations can be performed.
Royalties
Be aware of whether the royalty to be paid throughout the term is a fixed amount or a percentage of gross sales. If the royalty is a fixed amount, the franchisee will need to pay this amount regardless of whether any revenue was generated during the month or week, as applicable. During this time, franchisors may not be able to provide a complete royalty break, however they may be willing to provide for a ramp up of royalties which would provide for a graduated royalty amount that would increase over time until the total royalty payment is reached. For example, if the agreement called for a 4% royalty, the royalty would increase by 1% each month until month 4, at which point the 4% royalty would apply for the balance of the term.
Performance Criteria
Some systems implement minimum performance criteria which must be maintained throughout the term. Such performance criteria often provide the franchisor with certain rights, including the right to reduce the territory, take back the territory and/or terminate the franchise agreement altogether. During this era, it is important to have an honest discussion with the franchisor and other franchisees to determine whether such criteria will be attainable during any period of recovery after quarantine is lifted. The franchisor may be willing to delay the commencement of the performance criteria requirement to such point as a certain level of revenue is realized for a number of months in a row.
Force Majeure Provisions
A force majeure provision recognizes that certain events are outside the control of the parties and excuses them from the performance of certain obligations for the period of disruption or delay resulting from these events. Franchisees should ensure that such provisions are mutual (they apply to the obligations of both the franchisor and franchisee), and that they include more than general “Acts of God”, by expressly including pandemics, quarantine, health related emergency and/or government required closures.
Joanne Gilbert-Wiens is an associate in the Franchise, Retail and Distribution group. She can be contacted at jgilbert@kmblaw.com for further information about franchising.
This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice based on their specific situations.
