Controlling the Franchisee’s Location: Legal and Business Issues for International Franchisors

1. Controlling the Franchisee’s Location: Legal and Business Issues for International Franchisors Moderator: Carl Zwisler Gray Plant Mooty Washington, DC 2010 IDI Annual Conference Torino, Italy June 11-12, 2010

2. Panelists: Luciana Bassani Claudia Santos Cruz Dannemann Siemsen Advogados AVM ADVOGADOS Rio de Janeiro Brasil Lisbon, Portugal +55 21 2237 8714 +351 304 501 010 lbassani@dannemann.com.br claudia.cruz@avm-advogados.com Paul Jones Patrick Lindgren Jones & Co. ADVOCARE LAW OFFICE Toronto, Canada Helsinki, Finland 416.703.5716 +358 (0)10-666 5680 pjones@jonesco-law.ca patrick.lindgren@advocare.fi Anders Thylin Thylin Advokatbyrå AB Stockholm, Sweden +46 (0)8 545 141 65 anders.thylin@thylin.se

3. How to obtain and maintain control over the location of the franchisee’s outlet.

4. Objectives:  To identify and evaluate how franchisors obtain and retain control of the premises from which their franchisees operate;

5. To identify differences in laws and practices among countries which pertain to how franchisors may exercise lease controls; andTo identify issues which should be addressed in international franchise agreements to maximize franchisors’ ability to control leases of premises.

6. Thesis:  Franchisors everywhere wish to be able to make sure that the locations which they either select or approve for their franchisees remain a part of their franchise networks, even if the franchise relationship ends. 

7. Leasing practices differ so significantly that addressing them must be a part of the early consultation with local counsel when entering a new market.

8. 1. What is the objective of location control? • to protect franchisors if they sublease to obtain prime locations

9. ABC BRAND X Goodwill!! • to protect goodwill at locations which were selected/approved by the franchisor and developed under a franchise agreement

10. to profit as a (sub)landlord

11. to dissuade franchisees from terminating or not renewing their franchise agreements

12. 2.  Which form of franchise lease controls do franchisors use in your country?  Which do they not use? • Franchisor subleases or franchisor-mandated master franchisee subleases

13. Conditional lease assignment

14. Zor Store Silvia Enterprises • Franchisor has right to acquire premises and business upon termination of franchise (with or without rights under lease) • Post term non-compete covenant

15. 3.  What is the typical lease term in your country?  Is it generally renewable?

16. 4.  Is the duration of commercial lease terms usually consistent with the terms of franchise agreements used by franchisors?  If not, how are the differences accommodated?

17. 5.  How do local laws or practices affect landlords’ and tenants’ rights upon: • Termination of a lease • for cause • without cause

18. Expiration of a lease

19. You owe me 3 years rent…NOW!! • Right to accelerate rent

20. Right to collect damages • How is this quantified?

21. BARGAIN!!! • Duty to mitigate damages/relet the premises

22. Right to enter location and seize personal property to satisfy claims against the tenant

23. Right to acquire or operate the tenant's business operated from the premises

24. Duty to offer renewal and conditions of any mandatory offer EXPIRED

25. 6.  May franchisors exercise control over franchisees' premises without the landlord agreeing to the controls in its lease with the franchisee? Zor: FA says I can now occupy this space Landlord: Oh.. Really?

26. 7. What legal or practical problems arise if a franchisor subleases property to its franchisees? Landlord: You owe me regardless

27. Franchisee default results in duty of franchisor/sublandlord to pay rent and operate business or find a franchisee

28. Restrictions on marking up rent which it charges subtenant/franchisee

29. Franchisee right to assign the lease Take my store, Please!

30. Franchisee right to renew upon lease expiration, even if franchise has expired or terminated

31. Prohibition on foreign franchisor owning local business or an interest in real estate or operating certain types of businesses

32. License required to engage in business of leasing real estate

33. 8. Are landlords and franchisees generally willing to enter into conditional lease assignments in your country? Landlord: You must be kidding.

34. 9. Must enforcement of a franchisor's rights under a lease take place in a local court rather than through arbitration or litigation in foreign courts?

35. 10. Will a choice of a foreign law have any impact upon obligations under a lease or a sublease?

36. 11. Which language do franchisors usually demand that franchisees have in leases to protect franchisors’ rights under their franchise agreements? 

37. 12. Are landlords generally amenable to accepting these terms? Landlord: You must be kidding, Silvia.

38. Thank you, Carl E. Zwisler Gray Plant Mooty 2600 Virginia Avenue, NW Suite 1111 – The Watergate Washington, DC 20037 Phone: 202-295-2225 Facsimile: 202-295-2275 carl.zwisler@gpmlaw.com