Sale of the Franchisees' Rights

The franchisor must always be in complete control of the franchise network and be able to choose its sub-franchisors and developers, at its complete discretion. This means that the franchise agreement must always give the franchisor the right to veto the sale of a sub-franchisor's or developer's business to an unapproved third party

The franchisor has the ultimate decision on who can join that system as a franchisee and he will be concerned that the new franchisee is the right person for the franchise. The franchisor must always assess the financial status of the assignee and its ability to pay any remaining balance of the franchise fee and the periodic and advertising fees. It should also consider whether the purchaser is compatible with the image of the franchise system. The franchisor may for example have a strong public stance on certain issues with which any assignee must be compatible. It is difficult to envisage The Body Shop International giving a franchise to a furrier!

The agreement should contain detailed provisions on assignment which must always be followed. These provisions should be carefully thought through and usually contain pre-emption rights giving the franchisor the right of first refusal. It should also lay down time limits within which these rights can be exercised. It is not uncommon for the franchisor to be entitled to a percentage of any price paid by a third party purchaser, either as a recognition of its rights over the franchisee's goodwill, or as a finder's fee if it locates a purchaser.

It may even be that the franchisor wishes to 'buy-back' the territory concerned and exercise any pre-emption rights it holds, in which case it may be appropriate for it to obtain a discount on the open market price.

Termination

Franchisors should take specialist legal advice, in each country belonging to the international franchise system, on the consequences of termination of the franchise contract. The franchisor must establish whether franchisees will be protected by local distributor or commercial agent legislation protective of parties contracting with suppliers. Such legislation will often establish significant termination rights for the franchisee. The legislation will often take precedent over the terms of the franchise agreement thereby rendering the contract provisions for termination procedures and rights irrelevant. Legislation may apply even on a refusal to renew a limited duration fixed term franchise agreement on its normal expiration date.

The consequences for a franchisor terminating the contract of a franchisee who is protected by local legislation must always be very carefully considered before deciding upon termination as an appropriate course of action.

The local legislation will usually define the nature of 'just cause' for termination of the distributor/commercial agent agreement. Certain conduct will nearly always qualify as just cause:

(a) commission of a serious crime such as fraud

(b) bankruptcy

(c) gross negligence of the local party causing substantial damage to the supplier's interest

(d) breach of a fundamental provision of the contract, for example, a franchisee's refusal to render any accounts or pay any royalties at all to the principal.