COVID-19 has applied pressure on many franchised businesses in recent months. Trading has been interrupted and some unable generate any income at all. With the lockdown gradually easing, completely normal trading conditions may still be months away, so we asked our affiliate legal advisors what’s the legal position on franchisee Management Service Fees (MSF): are franchisees still required to pay? The resounding ‘official’ answer was that it depends on the individual wording of contracts however, franchisors and franchisees should have one overriding aim: to work together to see how they can ensure they all have viable businesses for the future.
John Pratt, of franchising’s legal experts, Hamilton Pratt explains: “As the largest franchising law firm in Europe we represent 40% of the bfa’s members. 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 both franchisees and franchisors is rather than to 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 like d&t for forecasting, advice on the loan schemes and the other financial support available. It is everyone’s interests that business can open as usual in the future and working together is often the best way to overcome challenges even in these very difficult times.”
Roz Goldstein of Goldstein Legal confirms: “Practicality needs to take precedent over the detailed wording of contracts currently. As well as questions about force majeure clauses related to franchise fees, we are also dealing with enquiries from franchisees and franchisors who are tenants. Do they have to pay rent for premises when they can’t trade? Naturally, retail franchises are particularly affected. From a legal perspective, again 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 rather than trying to enforce legal obligations through force majeure clauses that were not written to anticipate the chaos that this pandemic has brought.
“Moving forwards, as franchised businesses go back to work, certainly it may be worth considering changes to terms and conditions at some point. However, in the short term, we are advising that clients address their position relating to COVID-19 by email and spend their energy focusing on current business activities to get through. There will be time to revise force majeure clauses more appropriately when the dust settles.”
It is true to say, that no-one really anticipated the widespread challenges the pandemic would cause to our economy and the way we do business. 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. Obviously, no-one saw this coming, but now we’re in it, it’s actually a far simpler task to navigate it with careful business planning.
What we are hearing from our legal colleagues is that communication is king to negotiating the best outcomes for all concerned. Certainly, having a clear handle on the numbers and accurate financial forecasts can help business planning and evaluate what financial support is available. At d&t our accountancy and business planning experts are on hand to help make franchisees and franchisors make these informed decisions.
Stay safe and see you on the other side.