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CHLA Spring 2014

FRANCHISE AGREEMENTS TIP Don’t wait to receive a notice of termination to notify your counsel. Certain systems have a review committee that will allow you to challenge a notice of termination. Other franchisors have administrative procedures by which you can seek relief from certain mandates. Further, putting the franchisor on notice that you are represented by counsel, and by using your counsel to present your situation, before you end up being terminated or sued, is likely to result in a far more favorable resolution for the franchisee. Yes, it will have a cost attached, but that cost is likely to be far less than the costs resulting from the alternative path. TIP Consider the franchisor’s impact policies as a substitute for a defined AOP. For example, if the defined AOP is a one mile radius from the hotel, the franchisor may put a flag on a property, one mile and one foot from your hotel. The franchisor is within its rights. If the impact policy has teeth, then that same hotel may be precluded. 14 California Hotel & Lodging Association SPRIng 2014 Liquidated damages and breach provisions Liquidated damages can frequently be negotiated and should be. Certain franchise policies allow franchisors the right to terminate a franchisee if they receive a second unsatisfactory QA score within 12 months of having received the first failing score. Area of impact/ encroachment/ cross brand protection The more powerful franchisors will be less willing to give extensive, if any, area of protection (AOP). If the best franchisors only produce 35% to 40% reservation contribution, you need to ask yourself, “Is it worth it? Should I go to another franchisor who may be more accommodating?” Also, when negotiating AOP provisions think about a franchisor’s other flags, as well as future acquired or developed flags by the same franchisor. Maintaining relationships with franchisees—the implied covenant of good faith The implied covenant of good faith and fair dealing may provide a semblance of protection. However, recent contracts issued by major franchisors seek to have the franchisee waive the implied covenants application to the specific contract. Recently, California adopted legislation requiring franchise agreements to include a good faith and fair dealing requirement, that good faith being defined as honesty in fact and following commercial standards of fair dealing. This will help California franchisees, to what extent, remains to be seen. The new law may also be a model for other states in the future. 


CHLA Spring 2014
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