The COVID-19 pandemic has impacted the franchise industry in unprecedented ways. In addition to fundamentally changing the way that many franchisors and franchisees operate, the pandemic has heavily influenced franchise agreement negotiations. Here, franchise attorney Jeffrey M. Goldstein discusses five franchise agreement provisions that require careful consideration in the wake of the pandemic:
1. System Standards
Standardization is one of the hallmarks of franchising. Knowing exactly what they can expect is what brings many customers through franchisees’ doors. But, as the pandemic showed, sometimes franchisees need to improvise in order to keep their doors open (or serve their customers virtually), and sometimes what works in one location won’t necessarily work in another.
In this vein, prospective franchisees should carefully consider designated supplier provisions as well. If your franchise agreement requires you to use a designated supplier and that supplier cannot meet your franchisee’s needs due to unforeseen circumstances, what options do you have available? Negotiating protections into your franchise agreement could be critical for obtaining necessary supplies and inventory from other sources.
2. Minimum Royalties and Marketing Fund Contributions
Some franchise agreements include provisions for minimum royalties and marketing fund contributions. These provisions require franchisees to pay a certain amount each week or month regardless of their revenue. While these provisions are designed to protect franchisors, they are fundamentally unfair when franchisees are unable to generate sufficient revenue through no fault of their own. When negotiating franchise agreements that contain these provisions, prospective franchisees should think carefully about the financial risks involved.
3. Cure Periods
It is fairly common for franchise agreements to include 10-day or 30-day cure periods for certain breaches (i.e. non-payment of royalties). While the fairness of these types of provisions can be debated under normal circumstances, in a pandemic-type scenario, they can leave even highly-successful franchisees significantly exposed.
4. Legal Compliance
It is also fairly common for franchise agreements to include provisions that require franchisees to comply with all applicable laws and regulations. While these provisions have also traditionally been designed to protect franchisors, franchisees should consider using these provisions to obtain protections that allow them to deviate from system standards when necessary to address the economic impacts of lockdowns, capacity restrictions and other requirements established by legislation or executive order.
5. Force Majeure
The days of force majeure provisions being overlooked as boilerplate are over. These provisions allow for deviation from certain franchise agreement provisions in the event of pandemics, wars, major storms and other catastrophic events. When negotiating a franchise agreement, franchisees (and their franchise attorneys) must now carefully review the agreement’s force majeure clause and negotiate any modifications that are necessary to protect against the types of business risks presented by the COVID-19 crisis.
Discuss Your Franchise Agreement with National Franchise Attorney Jeffrey M. Goldstein
Are you thinking about buying a franchise in 2021? If so, it is extremely important that you hire an attorney to review and negotiate your franchise agreement. To learn about our fixed-fee franchise business review programs for prospective franchisees, call national franchise attorney Jeffrey M. Goldstein at 202-293-3947 or contact us online today.
