Question: I’m a Franchisor. Should I Include a Security Interest Clause in My Franchise Agreement?Answer:
If you are providing loan funds or vendor financing, then you should register a security interest on the Personal Property Securities Register (PPSR).
A security interest allows the franchisor to access a franchisee’s property if they do not meet the obligations or payments set out in the franchise agreement. For example:
- operating the franchise or undertaking marketing activities; or
- paying the franchise fees or other fees as required by the franchise model.
If you have deferred franchise fees or allowed the franchisee to delay paying some royalties, you should clarify this understanding with a security agreement and secure your ‘loan’ against the assets of the business.
A security interest can be a broad term in a franchise agreement. But ideally, it should be a separate general security agreement that deals with the loan or financial concession you have given the franchisee.
Do I Need to Register my Security on the PPSR?
Franchise agreements may include a clause allowing the franchisor to register the security interest on the PPSR. The security interest is held against the goods that you provide or potentially, the franchisee’s property. Some examples include:
- the equipment that you provide to the franchisee on a credit basis;
- the goods that are leased to the franchisee;
- the goods that are provided to the franchisee on a consignment basis; or
- if set out in the franchise agreement, the property of the franchisee such as motor vehicles, stock in trade, licences, financial property.
Registration is beneficial because if the franchisee defaults on payments or goes into liquidation, you can exercise your security interest and be ‘first in line’ to receive the money back. Further, if you don’t register your interest, you may not have the ability to offset your debt against the payment you need to make to the liquidator for the fit out if you take over the franchised store.
Under the PPSR, the priority of your security interest will be recorded and publicly available for all to see. The PPSA provides information on whether the franchisee’s business has already been secured against another lender. So, if the franchisee company enters into liquidation, registration can help you understand who you have to negotiate with.