California has amended it franchise laws! The amendments affect when, what, why, and how franchisors can terminate franchise agreement, prevent transfers, and choose not to renew franchises. The California amendments are indicative of a climate change in franchising where franchisees are granted more legislative rights. The law has been mellowed from what strong franchisee advocates purposed, but the changes are still a strong movement for pro-franchisee advocates. Below is an outline of the amendment requirements.
Termination: Franchisor may only terminate the franchise agreement:
- Upon 60 day notice and cure period for ‘good cause;’ or
- Immediately upon notice in the event of
- order for bankruptcy or insolvency
- all or a substantial part of the assets thereof are assigned to a creditor,
- franchisee admits his or her inability to pay his or her debts as they come due
- franchisee fails to operate the business for 5 consecutive days during which the franchisee is required to operate the business [except in event of fire, flood, earthquake, or other similar causes ]
- mutual agreement between franchisor and franchisee
- material misrepresentations made in being granted franchise
- franchisee engages in conduct which reflects materially and unfavorably upon the franchise or franchise system
- franchisee is convicted of a felony
- franchisee does not pay money due to franchisor or affiliates within 5 days from when due
- franchisor believes continued franchise operations is an imminent danger to public health or safety
Mandated Franchise Purchase of Inventory, Supplies, Equipment, Fixtures, and Furnishing. Even when the franchisor lawfully terminates or does not renew the franchise agreement the franchisor must purchase from the franchisee the inventory, supplies, equipment, fixtures, and furnishing. And, the purchase price is determined by law as:
Franchisee Purchase Price minus Depreciation equals Franchisor’s Purchase Price
The mandate for the franchisor to purchase franchise inventory, supplies, equipment, fixtures, and furnishing is not required if:
- personalized items, inventory, supplies, equipment, fixtures, or furnishings are not reasonably required to conduct the operation of the franchise business
- franchisee does not have clear title the item
- franchisee opts not to renew
- franchisor does not prevent franchisee from retaining control of the franchise premises
- franchisor publically announces decision to withdraw from the ‘geographic market area’ where the franchise is located
And, yes. The franchisor may offset against the amounts owed to a franchisee under this section any amounts owed by the franchisee to the franchisor.
Transfers: The franchisor CAN NOT prevent a franchisee transfer if the person meets the franchisor’s then-existing standards for franchisees made available to the franchisee.
This prohibition does not negate the franchisor’s right to approve or any franchisor’s right to first refusal.
The amendment [presumption ally] prescribes the protocol franchisor should use in the transfer. It says:
- Franchisor must approve or disapprove the transfer within 60 days in writing [or the transfer is approved].
- The approval or disapproval is matter of fact, which can be determined by court motion for summary judgment.
- Franchisor does not have to exercise its first right of refusal in the notice of approval or disapproval
- If the franchisor exercises the first right of refusal it must be equal in offer.
These amendments go into effect in 2016. To effectuate these changes, franchisors need to amend their franchise agreements or the California addendum to their franchise agreements and FDD.
Need assistance with making the changes. Call us at 513-400-3895 or send an email to [email protected] for assistance!