experts: real estate column Friday, October 21, 2011

Beware Of This Lethal Trap In Commercial Agreements

Carefully read the "Defaults" or "Remedies Upon Default" section when signing a commercial agreement.

By Dave Liden

I have a new client who lost her job earlier this year when her employer decided to downsize the company. After receiving a sizable severance payment from her employer, Christine decided that her best option was to purchase a franchise.

The purchaser of a franchise acquires the exclusive right to operate a particular business at a particular location, or within a particular area, for a fixed period of time. Your favourite Blenz Coffee location and the Quizno's nearest to you are probably franchised businesses; your favourite Starbucks is probably not.

When I first met Christine, she told me she had been successful in securing an informal "option" to operate a relatively new franchise in British Columbia within a key territory in Metro Vancouver. Christine wanted me to review the franchise agreement she would need to sign, however, time was of the essence because the owner of the franchise had told her there were a number of other people who wanted her territory, so she needed to commit to the purchase by October 14th at the very latest.

Let me digress briefly to give you a bit of background to the advice I gave Christine.

Many commercial agreements contain a section that is entitled "Defaults" or "Remedies Upon Default". This section states that if one of the parties defaults in performing any of his or her obligations under the agreement, he or she gets a "grace period" to cure or "fix" the default. This means the innocent party, i.e. the party not in default, cannot take any action (such as terminating the agreement) against the party in default unless he or she does not cure the default before the "grace period" expires. The length of the "grace period" - it could be 5 days, 5 business days, 7 days, 10 days, 14 days, etc. - will depend on the nature of the default.

For example, most commercial leases contain a "Remedies Upon Default" section. The most common kind of default by a commercial tenant is a failure to pay the rent on time. A typical Remedies Upon Breach section states that, if the tenant does not cure the failure to pay the rent on time within a certain period of time, the landlord is entitled to terminate the lease.

Back to Christine and the franchise agreement she needed to sign to complete her purchase of this franchise.

During my review of the franchise agreement, I came upon section 21, which is entitled, "Default And Termination". I must say I was truly shocked when I read section 21.1, which is entitled, "Defaults With No Right To Cure". (emphasis added)

Section 21.1 contains a relatively long list of events for which there is NO "GRACE PERIOD".

In other words, section 21.1 states that if any one of the many events listed in the section occurs, and if the owner of the franchise then gives a notice of termination to the franchisee (i.e. my client, Christine), THE FRANCHISEE IMMEDIATELY LOSES HIS OR HER FRANCHISE!!!

Here are two of the many events for which there is no "grace period":

"if the Franchisee uses any employee who does not meet our (i.e. the franchise owner's) then-current standards and training requirements"

"if the Franchisee fails to retain (or to produce on request) any records required to be maintained by the Franchisee"

My advice to Christine was to not buy this franchise.

I welcome your comments. My goal is to provide my clients with information on legal topics I think are likely to be of interest to them. If there is a legal topic you would like me to address in my Newsletter, please let me know by sending me an email to dliden@remediosandcompany.com Thank you.




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Recent Articles by this columnist:

Protecting Your Assets From Creditors: Do Trusts Work?
Wednesday, December 21, 2011


Business Owners: Make Sure You Know What's In Your Lease
Wednesday, June 22, 2011


All articles by Dave Liden

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