Franchise contracts: what to look out for

Franchise law specialist Amy Leite’s latest article on WorkingMums.co.uk focuses on the key terms to be aware of in a franchise agreement contract. 
 Franchise law specialist Amy Leite is currently writing a series of articles for WorkingMums.co.uk, a leading job and community website for professional working mothers (and fathers).

She continues her series of articles this month, focussing on the key franchise agreement terms of the franchise contract that franchisees should be aware of to help ensure they sign up with their eyes fully open.

The importance of reading your contract

There are key franchise agreement terms you should look out for in your draft franchise agreement. Firstly, I need to remind you that articles such as this should not be seen as a substitute for taking legal advice on the terms of your franchise agreement. These are more of a tool to help you have a working knowledge of the terms of the franchise agreement before you have it reviewed and thereafter.

We are often surprised to hear how many people do not take advice on the terms of their franchise agreement prior to signing it. Often we hear that this was because they were told it was non-negotiable or the fees for a review seemed high. In our experience, regardless of whether the franchise agreement is negotiable or not, being fully aware of what your franchise agreement means in order to take a considered commercial decision and enter the agreement with your eyes open is invaluable.

It is therefore very important that you have at least read the franchise agreement ahead of your solicitor carrying out a review for you. It is very rare that a franchise review (either by report or otherwise) would comment on every single clause of the agreement and, as you will be expected to abide by the terms, you need to be clear on what all the terms are however unimportant certain things may seem.

We are therefore preparing a series of articles which will cover, each time, two or three of the main clauses you need to be aware of in your franchise agreement. This first article will cover parties, the grant, territory and term.

The parties:

You need to be clear on who the parties to the franchise agreement are. The first party will be the franchisor which will almost always be a company. It is advisable to do some research at Companies House on how long the company has been going, if there are any similarly named companies and whether these are linked to the franchisor and have a look at their accounts if possible.

The second party to the franchise agreement will be the franchisee. The franchisee will either be a company or an individual person. Where the franchisee is a company there will be a third party to the franchise agreement who will be an individual who is a party to the franchise agreement for the purpose of guaranteeing all of the obligations of the company franchisee (usually they are described as the individual, principal or guarantor).

The key thing to understand is that because the franchisor is a company it will always have a limited liability status, but if you are the individual, principal or guarantor to a franchisee company you will not have limited liability status and you will be personally responsible for ensuring that the franchisee complies with their obligations under the terms of the franchise agreement. You will agree in the franchise agreement to personally guarantee the franchisee’s obligations and to indemnify the franchisor against costs and losses it suffers if the franchisee does not keep to their end of the deal. If you personally are the franchisee all of the responsibilities will be yours in any event.

Grant, Territory and Term:

The grant clause is one of the most important clauses in the franchise agreement, it sets out what the franchisee is being licensed by the franchisor to use and do during the term of the franchise agreement. It is key that you are clear on what your franchise business can do.

The franchisor will generally grant the franchisee the right to use their intellectual property, method or system (the know-how, procedures for operation of the business/provision of the services, expertise, methods of marketing etc) to operate the franchisee’s business in the territory during the term.

You should always check the definition of the “business”, “franchisee’s business” or “franchise business” so that you are clear what the business involves according to the terms of the franchise agreement. Generally, the “business”, “franchisee’s business” or “franchise business” will be limited to the provision of the defined Services and/or selling/using the defined Products or Equipment. You need to be sure that the definitions of Services and Products cover everything you believe you are entitled to do as part of the franchisee’s business as you will not be permitted to offer additional services/products without consent if they fall outside of the grant.

You should look closely at the territory you are being granted. It should be defined by a map attached as a schedule or a number of postcodes. Ensure that it is large enough to provide you with good income and look closely at the make- up of the territory – is it rural or town based and is it made up more or commercial or residential customers? Consider how this affects your target market.

You also need to be clear on what, if any, exclusivity you are being granted in respect of the territory. Is it exclusive only in terms of the franchisor not being allowed to grant third parties the right to operate in your territory or does it also expressly exclude the franchisor from operating in your territory too? Look out throughout the franchise agreement for circumstances in which your exclusivity does not apply or where it can be removed or limited, for example, in the case of national accounts or if you fail to hit any performance targets.

You must be clear that the rights you are granted by the franchisor only last for the term (the length) of the franchise agreement. Ordinarily a franchise agreement term is five or, less commonly, 10 years.

On expiry of the term if you do not renew your franchise agreement your rights under the franchise agreement will come to an end and you will no longer have a right to operate the franchisee’s business using the items the franchisor granted to you.

In the next article we will be looking at rights of renewal and the franchisor’s initial and continuing obligations.

More information

For more information please contact our Franchise Law Department.

For the full article on WorkingMums website click here