Franchise Lawyer Blog

Strengthen Your Franchise Agreement (Part I)

Our firm represents many franchisors. Franchisors have typically developed franchise agreements that have been tailored by time and experience to address the issues that most often arise in the development of their franchised businesses. However, even the most polished agreement can benefit from a periodic review and revision. We suggest five areas that frequently require attention in order to enhance enforcement rights, to protect against competition, to protect intellectual property and to protect against claims by third parties. The first two we will cover briefly in this entry, the next three in the entry that follows:

Security interest in the franchisee’s assets: In the event of a franchisee default, the franchisor should be able to take possession of franchisee”s assets for the purpose of selling those assets (possibly to a new franchisee) to recover monies due from the franchisee or to keep those assets to operate the unit. To ensure the right to do so, the franchisor should take a security interest in the furniture, fixtures and equipment that are used in the franchised business. This security interest can be created in the franchise agreement and can be perfected by a recorded UCC financing statement (UCC-1).

Collateral Assignment of Lease: In the event of franchisee”s default under its lease for its business premises, the lease should provide that the franchisor has the right, but not the obligation, to assume the lease without having to pay any consideration to landlord, cure any defaults or replenish the security deposit. These latter conditions are sometimes difficult to extract from a landlord, but the assignment right is imperative. In order to protect itself in this manner, the franchisor should require a Collateral Assignment of Lease that is entered into simultaneously with the franchisee”s lease. This will allow the franchisor to enforce its rights upon default without requiring the cooperation of the franchisee or consent of the landlord.

Our next blog entry will cover non-competition agreements, trade secrets and trademarks, and Insurance.

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