Why Franchisees Should Review Their Contracts Amid COVID-19

contract review

contract review

With the recent slow-down in business caused by the COVID-19 pandemic, a number of franchisees across Ontario have questions on their rights and obligations. Franchisees are reminded to review their contracts to see whether the COVID-19 pandemic gives franchisees the right to pay less fees or walk away from their contract completely.

Franchisees are not advised to stop all payments, including rent and royalties, as doing so can be a breach of their contractual obligations. Although the COVID-19 pandemic has caused interruption to businesses across Ontario, it has provided for a unique opportunity for franchisees to negotiate with their franchisor, landlord, suppliers, insurers, and lenders.

Hummingbird Lawyers LLP is here to help you explore your rights and obligations as a franchisee.

Franchisees are bound by several contracts

To own a franchise, franchisees must sign several contracts. These contracts typically include a franchise agreement, lease agreement, supplier agreement, insurance agreement, and loan agreements. It’s important for franchisees to remember that those agreements confirm their rights and obligations with their franchisor, landlord, suppliers, insurers, and lenders.

Franchisees may be entitled to pay less royalties

Franchisees should review their agreements to see whether the business interruption caused by COVID-19 gives them the right to pay less fees or walk away from their contract completely.

For example, relying on a Force Majeure clause in the agreement may allow one party to be excused in full or in part from performing their obligations under a contract due to certain circumstances outside of their control, such as a pandemic. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. Although it is unlikely for standard Force Majeure clauses to contain specific language that covers pandemics, it is nevertheless worth a review.

Franchise contract

Franchisees may be in breach of their obligations

Another reason for franchisees to review their agreements would be to see whether a slow down in business operations amid COVID-19 could put them in breach of their obligations.

For example, some food and beverage supplier agreements include clauses that require a minimum order. With no dine-in option for their customers, restaurant franchisees risk breaching their supplier agreements if they struggle to meet those minimum orders.

Franchisees have an opportunity to negotiate for cash flow relief

Franchisees that are either in breach or at risk of breaching their obligations under the franchise agreement amid COVID-19, should first consider negotiating with the franchisor. If gross sales are down, royalties are down. If royalties are down, the franchisor is losing money. It is in the franchisors best interest to work closely with franchisees to minimize business interruption. With so many franchisees facing a cash flow crisis, franchisors may be inclined to offer royalty reductions, royalty relief, or royalty deferral for a period of time. It is a good idea for Franchisees to start exploring these options if they are at risk of breaching their obligations.

Exploring Franchisee Rights

Our Business and Corporate lawyers have experience negotiating on behalf of numerous franchisee clients. If you would like to explore your rights and obligations amid the COVID-19 pandemic, our Business and Corporate lawyers are here to help review your agreements and give you their best opinion.

Call us or fill out the form below to get more information.

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Jonathan Kiang

Jonathan is an Associate Lawyer in the Wills & Estates and Corporate / Commercial practice groups at Hummingbird Lawyers LLP.

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