A collaborative approach is needed to overcome the COVID-19 challenges faced by franchisors and franchisees
COVID-19 has applied pressure on many franchised businesses in recent months. Trading has been interrupted and some have been unable to generate any income at all.
Although the lockdown is being gradually eased, normal trading conditions may still be months away, so we asked our affiliate legal advisers what’s the legal position on franchisee management service fees.
Are franchisees still required to pay them? The official answer is that it depends on the individual wording of contracts. However, franchisors and franchisees should have one overriding aim: to work together to ensure they have viable businesses in the future.
Force majeure clause
John Pratt of franchise legal specialist Hamilton Pratt explains: “The main question given the altered trading conditions concerns franchise fees and are they still applicable. The simple answer is that depends on the force majeure clause in individual contracts.
“However, my advice to franchisees and franchisors is rather than go down the legal route immediately, spend some time assessing the financial analysis together. Aim to come up with solutions to ensure both parties have a functioning franchise in three months’ time and beyond.
“This may well include using business planning and accountancy experts for forecasting and advice on the loan schemes and other financial support available. It’s in everyone’s interests that businesses can open as usual in the future and working together is often the best way to overcome challenges even in these difficult times.”
Practicality must take precedence
Roz Goldstein of Goldstein Legal believes practicality must take precedence over the detailed wording of contracts.
“As well as questions about force majeure clauses related to franchise fees, we are also dealing with enquiries from franchisees and franchisors who specialist are tenants,” she adds. “Do they have to pay rent for premises when they can’t trade? Naturally, retail franchises are particularly affected.
“From a legal perspective, the answer comes down to what individual contracts say. However, if franchises can’t pay, landlords need to be realistic. Negotiation and talking through options are more likely to achieve the best outcome for all parties than trying to enforce legal obligations through force majeure clauses that were not written to anticipate the chaos this pandemic has brought.
“Moving forwards, as franchised businesses reopen it may be worth considering changes to terms and conditions at some point. However, in the short term, we’re advising that clients address their position relating to COVID-19 by email and spend their energy focusing on current business activities to get through.”
Duty of care
No one anticipated the widespread business challenges the pandemic has presented. However, franchisors have a duty of care to protect the long-term interests of their franchisees.
Regardless of what their contracts say, they should be looking at viable solutions to help sustain and mitigate any upcoming risk.
What we’re hearing from our legal colleagues is that communication is king to negotiating the best outcomes for all concerned.
James Thomas is commercial manager at award-winning chartered accountancy and business advisory specialist, d&t.