10 Franchise L.J. 1 (1990-1991)

handle is hein.journals/fchlj10 and id is 1 raw text is: -       .  .  ..  .A i

Renewals: Questions and Pitfalls
for Franchisors and Some Distributors
by John R.F. Baer and Pamela J. Mills*
Chicago, Illinois

Pamela J. Mills

When business format franchising was in its formative
stages, counsel generally drafted simple renewal provisions
for franchise agreements. The provisions were designed to
satisfy franchisees' desires to keep their franchises beyond
the initial term while minimizing any obligation on the
franchisor. These provisions generally granted the franchi-
see some right to renew or negotiate renewal, but were vague
concerning the franchisee's exercise of these rights. Unfore-
seen statutes and regulations; the evolution and sophisti-
cation of franchising; the art of drafting franchise agreements
and structuring the franchise system; changing business
conditions; rapid franchise system changes; plus a myriad
of other factors have left franchisors facing tough renewal
choices from legal and business perspectives, whether the
renewal is of one franchise or systemwide. Unfortunately,
franchisors have little guidance in how to make these choices
and there are very few reported court decisions involving
renewal issues.
The goal of any franchisor in renewing a franchise is sim-
ple-to bring the franchisee's operation up to the franchi-
sor's current standards and specifications for appearance
and operations, hopefully using the franchisor's current form
*Mr. Baer and Ms. Mills are partners in the Chicago office of Keck, Mahin
& Cate.

franchise agreement with all of its recently devised fees, pro-
tections, and provisions. The goal of the franchisee is the
opposite-to minimize its investment in connection with
the renewal while preserving as closely as possible many
benefits of its prior franchise relationship. The conflict in
these goals is exacerbated when renewal is systemwide and
the franchisor faces renewal of numbers of franchisees, who
may have conflicts among themselves.
Imagine the plight of a franchisor facing renewal within
a short time span of half of its franchised system. Many
renewing franchisees currently pay a 2 percent advertising
fund contribution, while newer franchisees pay 4 percent.
Older franchisees threaten to leave the system if they are
required to pay the higher amount; newer franchisees
threaten to leave if they must continue bearing the brunt of
the advertising burden. A provision stating that all franchi-
sees must renew on the current form franchise agreement
does not resolve any issues because the franchisor has the
power to modify this form.
(continued on page 13)

Jonn N. r. baer

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