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Franchisee, Rethink Your Boilerplate Lease

When attorneys negotiate commercial leases, oftentimes they breeze through (or overlook entirely) the “boilerplate” clauses. Think boilerplate provisions are unimportant? Ask if a franchise owner was affected by Hurricane Katrina, Superstorm Sandy, or the tornadoes that hit Bronson, Missouri.  Also, ask the attorney who did not catch a poorly drafted notice provision and it cost his client from being able to exercise a critical remedy under the lease. Last, ask a franchisee who is deemed to have “waived” a right in his lease. 

Force Majeure

When negotiating force majeure clauses, make sure the clause applies equally to all parties. Be sure to include specific examples of events that will excuse performance under the clause. The following are three basic categories of these kinds of events:

  1. Natural disasters, such as earthquakes, hurricanes, floods, tornadoes and fires
  2. Human events, such as wars, riots, terrorism, or other major upheavals
  3. Performance failures outside the control of the contracting party, such as labor disputes and governmental restrictions

Here are two drafting considerations for force majeure provisions: 

  1. Don’t obsess over what the force majeure clause should cover. Fire, flood, storm, earthquake, lighting, insurrection, terrorism, fear of terrorism, acts of God, meteor strike — the list of hypothetical “bad” events covered under force majeure could go on and on. The attorney should strongly consider adding a “catch all” phrase such as “or other similar catastrophic events unforeseen by the parties” or “…or other situations beyond the control of the parties.” That way the franchisee has a plausible argument that it may be covered for other situations that hamper performance even if they are not specifically listed. 

  2. Attempt to broaden the definition. If the force majeure clause refers to situations beyond the control of the parties that make performance “illegal or impossible,” consider modifying that standard by adding “commercially impracticable.”

Notice

It is imperative that the attorney reviewing the lease review the notice provision carefully to make sure it is both sufficient and practical for the deal at hand. Five key issues to consider are:

  1. The form of the notice 
  2. The method or methods by which notices must be sent
  3. The time at which notices are deemed to be effectively given
  4. Who should get the notice
  5. How changes of address are to be effectively communicated

Many notice provisions will permit notices by first class mail, facsimile, and more often than not email as well. One should consider whether a notice that can have a dramatic impact (such as a notice of default, request for cure, etc.) should be specifically required to be sent via overnight courier or registered or certified mail. It is my experience that people pay more attention when they receive a FedEx package. Also, do you really want to leave it up to your client’s spam filter whether he or she gets notice of default?

Regarding the time at which notices are deemed to be effectively given, there are two main considerations: 

  1. Should notices be deemed to be given only if actually received, or upon some stated number of days after sending?
  2. Is the number of days provided for realistic?

The answers to both are deal specific. For example, a common provision is “Five days after notice.” If a party has “five days after notice” to take action, and the notice provision says that notices are deemed to be given upon deposit in the U.S. mail, it is quite possible that two or three days of the five-day period will elapse before the party actually receives the notice (thereby reducing the actual response period to only two or three days). There is also the chance the mail parcel is lost, so this provision also deals with which party bears the risk of loss.

With respect to who gets the notice, it is best practice to have the notice sent to the proper person at the company with a copy to counsel. Last,  a notice provision is not valid if served at the wrong address, so one should really think hard about making that a “special notice” that requires special delivery, such as certified mail or FedEx. The longer the length of the lease, the more important it is.

Waiver provisions address acts or omissions that have the potential to function as a renouncement of rights and remedies otherwise available under the lease. In other words, it is the voluntary abandonment or relinquishment of a known right. By including waiver provisions in a lease, the parties expressly agree that specific acts and omissions that could constitute a waiver will not be deemed a waiver. Another basic function of waiver provisions is to give a franchisee some assurance that its failure to require the landlord’s strict adherence to a contract term will not result in a complete and unintended loss of the franchisee’s contract rights if it later decides that strict performance is desirable. For example, if a franchisee was entitled to any number of successive five-year renewal terms under a lease, and the lease contained a properly drafted waiver provision, the landlord could not prevent the franchisee from exercising its second five-year renewal term based on the franchisee’s default(s) during the original term.

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