Fair Franchising Is Not an Oxymoron: Transferability

In 1998 the Asian American Hotel Owners Association identified a set of standards called the 12 Points of Fair Franchising by which to judge the actions of franchise companies. Now, nine years later, AAHOA has updated the 12 points and has embarked on a survey of franchisors to assess their compliance with these fair franchising standards. I highlight Point 11.

Point 11: Transferability

In situations in which a Franchisee seeks to transfer its property to an unrelated third-party, the Franchisor should not delay, withhold its consent, or impose conditions on the transfer in an unreasonable, arbitrary or capricious manner. Transfer fees should be fair and reasonable (i.e., generally no more than $1,500), and based solely on the estimated administrative costs to process the transfer.

There should be no fees for a Franchisee’s transfer to a spouse, child, parent, sibling, niece, nephew, descendant, spouse’s descendant, or other family member, if the transferee is legally competent to assume the Franchisee’s obligations under the franchise agreement.

There also should be no transfer fees for a Franchisee’s buyout of other shareholders or partners who had an interest in the Facility, or for the addition of any shareholders or partners who will gain an interest in the Facility.

In the event of a requested transfer, Franchisors should not condition the granting of the request on a requirement that the Franchisee or new owner adopt an extensive renovation or modernization plan for the subject property. Any required renovations for the subject property in connection with a transfer should be limited to only those specific items identified in the last two (2) quality assurance (QA) inspection reports for the subject Facility that were issued prior to the requested transfer.

To the extent a Franchisor approves a requested transfer, the Franchisor should not seek liquidated damages (LDs) from the prior Franchisee, or seek any increased fees from the new Franchisee or new owner of the subject Facility, because the Franchisee sought to transfer its Facility prior to the scheduled termination date of its franchise agreement.

Within ten (10) days of the completion of an approved transfer of a subject Facility, Franchisors should automatically release the prior Franchisee from any and all obligations it had under the terminated franchise agreement, and provide it with a written letter of release in connection therewith. (See AAHOA's 12 Points of Fair Franchising

In addition to the important fair franchising standards set forth by AAHOA in their Point II above, there are other important issues regarding the right of franchisees to sell the franchise to a third party.

1. Franchisees should negotiate a provision that requires that the franchisor will not “unreasonably withhold” consent to the transfer.

2. Instead of agreeing to allow the franchisor to have “the first right of refusal”, ask for a “right of first offer”. Rights of first refusal delays the sale from 30 to 60 days until the franchisor decides whether it wants to buy the property. By then, potential franchise purchasers may disappear. On the other hand, the clause “right of first offer” allows the franchisee to set the purchase price and terms and to offer the property to the franchisor for a specified time period. After that time, the franchisee has the right to sell to a third party.

3. Franchisees should negotiate a provision in the franchise agreement that allows the new owner to assume the existing franchise agreement.

4. In the event that a transfer, extension or resale requires a new franchise agreement, the terms should be substantially the same as the original agreement.

5. Upon the sale or transfer of the franchise, many agreements stipulate that the franchisee must sign a general release of any claims against the franchisor. With this clause, the franchisee releases the franchisor and all its employees, representatives, attorneys and shareholders and forgoes the right to file any claim against the franchisor forever. Instead, negotiate a mutual release of claims where both sides release the other side in the event of a sale or transfer.

This is part of a series. Please also read:

• Part 8. Fair Franchising: Venue and Law Clauses
• Part 7. Fair Franchising: Dispute Resolution,
• Part 6. Fair Franchising: Maintaining Robust Relations
• Part 5. Fair Franchising: Disclosure & Accountability
• Part 4. Fair Franchising And Vendor Exclusivity
• Part 3. Fair Franchising Is Not An Oxymoron
• Part 2. Fair Franchising Is Not An Oxymoron
• Part 1. Fair Franchising Is Not An Oxymoron

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Stanley Turkel, MHS, ISHC, is a New York-based hotel consultant specializing in hotel franchising issues, asset management and litigation support services. He is also available for due diligence studies for an acquisition, a third-party audit of a marketing or operational problem, an expert review of a management contract or a franchise agreement, or litigation support. Mr. Turkel is a member of the International Society of Hospitality Consultants and can be reached at 917-628-8549 or email at stanturkel@aol.com

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Stanley will be speaking on the program of the CHOC Owner’s Summit in Dallas, TX April 6-8, 2008.