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CHLA Spring 2014

FRANCHISE AGREEMENTS Legal Issues and Practical Tips The following discussion highlights some important legal issues. In no way, is it intended as an exhaustive treatment of the subject matter. Further, you should always consult your counsel regarding the applicability of any legal opinions or strategies to your specific situation. issues when negotiating a franchise agreement for a hotel to be built • nUMBER OF ROOMS You may wish to build the hotel in phases. Make sure that the agreement allows you to add rooms, if you want to build in phases, or add rooms at a later date, then include this stipulation in the franchise agreement. • TIMIng Development and construction are uncertain and unpredictable processes. Governmental processes and related administrative agencies move at their own pace, over which you have little or no control. These uncertainties need to be expressly considered in the franchise agreement to avoid certain negative consequences, including breach of the franchise agreement and extension fees. Remember, if you don’t negotiate this and construction is delayed, you have problems that are usually 100% avoidable. • SPECiFY WHAT iS TO BE BUiLT The franchisor can and may change brand standards during construction, requiring that the franchisee to modify the project before opening. Result: substantial delays and change orders; all of which cost the franchisee considerable sums of money. • MiniMiZE POST-OPEninG CAPiTAL EXPEnDiTURES The franchisee has just spent millions of dollars to construct a beautiful new hotel. All franchise agreements allow for the franchisor to mandate upgraded brand standards and systems modifications, including property management systems. For some period of time following the opening of the hotel, it is perfectly reasonable for the franchisee to know that it will not have to make substantial expenditures to replace or modify a brand new building, equipment, etc. The dollar limitations and the time limitations must be negotiated. • LiQUiDATED DAMAGES If the project never gets built or cannot be developed in the time schedule required by the franchise agreement, the franchisee will likely lose the license. Minimize or eliminate liquidated damages in these situations. This must be negotiated up front to avoid a very negative position in which the franchisee has little, if any, leverage. • ROYALTY RAMP-UP Try to get the franchisor to reduce royalties during the first 12–36 months of operations. This will help to reduce cash outflows while you are building the business. Early termination (windows) Early termination provisions are a two-edged sword. Windows may well be advisable but one must negotiate the terms and be aware of unintended consequences. Sometimes, the early termination provision will be voided by the terms of the agreement, which states that the franchisee must not have been in default during the term of the agreement. More commonly, the agreements require that the franchisee be in good standing when delivering the required notice and also on the effective date of termination. TIP The failure of franchisees to deliver timely notice of intention to terminate pursuant to the early termination right, is one of the most frequent mistakes I hear about. Beware.  TIP Agree that a certain set of plans and specifications as of a definitive date, will be the controlling requirements and the franchisee will not be required to make changes after that date and before opening.  12 California Hotel & Lodging Association SPRIng 2014


CHLA Spring 2014
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