Franchisor obligations during transfer

The Franchising Code of Conduct does not provide a step-by-step process for transfers. Instead, the transfer process is dictated by the terms of the Franchise Agreement, usually negotiated by the franchise solicitors prior to entering the Agreement. As a result, the method by which transfers are determined is different in each franchise system.

Certain variations to the franchise relationship that are materially relevant to franchisees or potential franchisees will invoke this notice requirement, including the following:

  • A change in ownership or control of the franchisor (clause 17(3)(a)(i) of the Code) or
  • A change in the ownership or control of any relevant intellectual property used in the franchise network (clause 17(3)(h)).

If this occurs, the franchisor is required under clause 17(2) of the Code to provide the current or potential franchisees with reasonable notice (usually 14 days or less). If you have not received this notice, you should notify your franchise solicitor immediately.

Additionally, notice must be given when the franchisor goes into administration (voluntary or otherwise) and the franchisor must give to the franchisees the name and address of whomever is appointed in the administration process (clause 17(g)). If your franchisor has gone into administration, get in touch with your franchise solicitor for advice on how to proceed.

Rules around obtaining franchisee consent

While most franchise agreements will not require franchisors to obtain the express consent of all franchisees in the network, in a commercial sense, a prospective buyer may prefer to start the franchise relationship with franchisees that are receptive to this change.

In some circumstances, the franchise solicitor of the potential purchaser will make the sale conditional on getting the support of a majority of the franchisee network.

In some cases, transactions are structured so that the franchisor gets the support of a specified percentage of the network to agree to the change in ownership.

Signatures and approval

Ordinarily, the terms of the Agreement determine the need to sign or receive anything, though in some cases, the purchaser’s franchise solicitor may require signatures from a certain number of the franchisees consenting to the arrangement. Another common clause often found in franchise agreements is a clause requiring franchisees to sign a Deed of Assignment or other document stating no further claims will be made against the franchisor.

More often than not, franchisees are not consulted before these decisions are made. Instead, the franchisor notifies the franchisees of the change in ownership/interest, transfers the interest to the purchaser, and assigns the rights and duties under the Agreement to the new franchisor.

It is not uncommon for the Agreement to release the franchisor from any ongoing obligations and liability to the terms of the Agreement once a transfer/novation of the Agreement has taken place. This clause sometimes requires the franchisor to obtain from the purchaser a Deed affirming that it will comply with the terms of the Agreement after the completion of the sale. Franchisees will not always need to give their consent or sign, although the Agreement to take over as the new franchisor is generally drafted in a way favourable to the franchisees. If you feel that your rights as franchisee have not been considered, you should speak with a franchise solicitor.

Rules surrounding provision of disclosure document

As a franchisee, you might expect to receive a disclosure document from the purchaser prior to completion. This, however, is not expressly required under the Code. Whether or not a disclosure document is provided may depend on the type of agreement entered into by the current franchisor and potential purchaser e.g. a Share Sale Agreement may not require any disclosure document (because the franchise agreement stays with the franchisor), however, upon transferring the actual Franchise Agreement, the purchaser, as assignee and the new franchisor, is usually expected to do the following:

  • Make a disclosure document; and
  • Distribute the document to the network of franchisees, along with a copy of the Code and a copy of the franchise agreement that the franchisee signed prior to the purchaser entering into the franchise agreement.

Whether the above is a requirement or merely common practice, the Code does require the franchisor and any new franchisors (i.e. purchasers) to supply an up-to-date disclosure document to franchisees that request one (within 14 days). Make sure the request is in writing, and if you have any problems, contact your franchise solicitor.

Conclusion

As a franchisee, or someone considering entering into a franchise agreement, it is important to remember that franchisors sometimes transfer their interest to new purchasers. Have your franchise solicitor review your documents if you’re uncertain about how these procedures are conducted, or, alternatively, get your solicitor to negotiate on your behalf during the initial stages prior to entering into the Agreement.

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