Australian KFC Franchisees Seek New Laws on Unfair Non-Renewals
Impact Study Addresses Quasi-Monopolistic Positions of Franchisors and Landlords
CANBERRA, Australia (Blue MauMau) - On November 9, 2007, the Indcorp Franchisees' Association of Australasia submitted The Impact of Non-Renewal upon Franchisees to the Productivity Committee in an effort to fill the gap which currently exists in the law. The study attempts to show how striking a fairer balance between the interest of the Franchisor/Landlord and the franchisee/tenant through introducing "good faith" obligation in renewing contracts would be a collateral benefit in containing costs.
The Indcorp association represents the interests of all 27 KFC fanchisees in Australia, which includes 24 independent operators and three corporate operators. In all, Indcorp members control approximately 400 KFC outlets, of which 190 are independent. The majority are family-run businesses. Its purpose is to provide a forum for franchisees in relationship to the Australasian franchise licensor Yum Restaurants Australia Pty Ltd.
The Crux of the Problem
The typical KFC Franchise Agreement is for a term of 10 years with one further renewal term of 10 years, and the majority of Indcorp members are now in their final term. When the franchisee enters an agreement, he or she also either enter into a lease with the landlord for the restaurant or the franchisor will take the lease and grant the franchisee a license to occupy the premises. Typically, if the unit is located in a shopping center, the term of the lease will be for a fixed period of five to seven years with no option for renewal.
The franchisee under the terms of the franchise agreement is required to invest a significant amount of money in building out the premises, which includes structural changes and the purchase and installation of equipment. They typical cost of the entire buildout of the restaurant can be approximately $750,000.
At the end of the lease term, the landlord ends up with the stronger bargaining position against the franchisee, and uses aggressive tactics to increase the rent for another term. The impact study states that the increase can be in the range of 30 to 50 percent and sometimes exceeds 80 percent. The franchisee is in a very vulnerable position because of the investment he has made in the premises, the cost of which may not have been fully recouped after his term has expired, even after depreciation. Failure to renew the lease will leave the franchisee in breach of contract resulting in obligations of paying future royalties through the balance of the franchise contract.
Moving of the franchise outlet is seldom an option because the franchisee would have to incur the cost of relocation. And, according to most lease agreements, he would have to restore the premises to its original state causing him to restructure the restaurant and remove the equipment, another large expense.
If the franchisee chooses to sell his restaurant he is again facing problems. When selling a "going business" the purchase price is usually calculated on the basis of a multiple of EBITDA earnings. Where there is no franchise term or lease term remaining, no value can be attributed to the business on that basis.
Franchisor and Landlord Have the Advantage
At the end of the term of the franchise agreement, the franchisor acting opportunistically seeks to appropriate the business and the goodwill which has been built up by the franchisee during the term of operation at the premises. According to the study, this can be the worst-case scenario in that the franchisee must cease doing business. He will lose the entire value of the franchise, as well as the capital value of the fitout and other improvements.
As for the landlord, there may be economic incentives for not renewing the franchisee's lease. If higher rent can be extracted from a new tenant due to the goodwill generated by the current franchisee tenant (considered nine tenths of the business asset), the leasing company can legally chose not to offer him a new lease.
Franchisees Make Recommendations
Because these problems are not addressed by existing State law legislation, the Indcorp members recommend that a "good faith" requirement needs to be introduced to address the issues of non-renewal.
They state that a "good faith" obligation to renew should be imposed on the franchisor and landlord, and they give examples and list restrictions. Introducing a "good faith" obligation would potentially have the additional benefit of eliminating exorbitant and unconscionable rent increases. And they state that pegging the renewal of term to market in the absence of agreement between the parties, might be an effective mechanism for redressing the imbalance between landlord and tenant at the end of the term.
Their proposed measures does state that a collateral benefit would be the containment of costs as a result of franchisor and landlords no longer being in a position to exploit their quasi-monopolistic positions. "This would result in improved efficiencies and productivity and a net benefit to end consumers."
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Additional readings:
| Attachment | Size |
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| NonRenewal.pdf | 1.15 MB |
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