I am a franchisor: What legal fees can I pass on to franchisees under the new Code? – Company / Commercial law

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In the past, franchisors could bill their franchisees for all legal fees incurred during the term of franchise agreements. However, recent landmark changes to the Franchise Code of Conduct (the Code), which will take effect on July 1, 2021, are expected to change the way franchisors’ legal fees are handled. In particular, there is a provision in the new Code of great concern to franchisors, possibly because it could incur a significant cost due to rising legal bills.

As a franchisor, you need to be aware of these changes so that you can prepare for them. This includes undertaking a review of your cost and fee structures and ensuring that your practices do not violate the new Code. This article will explain the relevant changes to the Code and what they mean for franchisors.

What is the current law?

It is common for franchisors to pass legal fees on to their franchisees during the term of their franchise agreement. Frequently, an invoice for legal fees will accompany, for example:

  • notice of violation;
  • notices of termination;
  • renewal documents; and
  • acts of all kinds.

These invoices, representing the legal fees owed by the franchisor for the preparation of the relevant document, are often inexpensive.

Most model franchise agreements contain a global clause authorizing the franchisor to recover all legal costs incurred under the specific franchise agreement from the franchisee. The clause does not specify or quantify what these costs are.

Essentially, contractual arrangements of this nature were intended to protect franchisors from liability for legal fees due to the action or inaction of the franchisee. This means that the franchisors have not paid in the event, for example:

  • breach, termination or renewal of a franchisee; or
  • the sale of a franchise business.

However, once the changes to the Code come into effect on July 1, billing for legal costs will be prohibited, so franchisors will be prohibited from recovering all or part of legal costs incurred under the franchise agreement. specific, provided that these costs are incurred after the deductible. the business in question begins operations.

The new code and the invoicing of legal fees to franchisees

The amending regulations provide, in section 19A (1), that a franchisor shall not enter into a franchise agreement which requires the franchisee to pay all or part of the franchisor’s legal service fees for documents “relating to the contract”. . The term “relating to” seems intentionally broad and is intended to encompass all:

  • notice of violation;
  • notices of termination;
  • renewal documents; and
  • similar.

When interpreting legislative provisions, you must give words their ordinary and everyday meaning. The term “relating to” in everyday language is a broad term and you should apply it accordingly.

Article 10A (2) lists the only exception to this general rule, being the payment of:

(a) a fixed amount;

(b) which is specified in the agreement; and

(c) to be paid before the franchisee starts the franchise business; and

(d) concerns the costs incurred by the franchisor for the preparation, negotiation or execution of the franchise agreement (i.e. what is generally referred to as documentation costs).

The interpretation of this provision is in accordance with the explanatory memorandum accompanying the regulation. It provides that the purpose of this amendment is to address concerns about franchise agreements that contain clauses exposing franchisees to future legal fees. These costs are, at the time of the conclusion of the franchise agreement, not quantifiable.

And the renewal?

Since a renewal occurs after a franchisee has started the franchise business, it seems that you, as the franchisor, can no longer charge for the preparation of the franchise agreement to be concluded during the renewal. To take this one step further, a franchisor will not be able to charge for lease negotiations or associated costs if the lease is renegotiated for any reason after the start of the franchise business. Since the costs associated with revising and negotiating commercial leases can be significant, this could and is likely to be a significant expense for retail and premises franchise systems.

What can I do to recover the costs?

Legal services cost money. It seems unfair that you, as a franchisor, lose your pocket if, for example, a franchisee continually violates the agreement, leaving you with the bill resulting from the formal documentation of those violations. However, there are solutions you can implement.

Adjust the fee model

Franchisors may introduce new fees triggered by events. For example, “violation fees” or “termination fees”. If you are considering this, it is important that you write these charges down carefully. Otherwise, you might get yourself the provision of the new Code described in this article.

In addition, you must ensure that the charges cannot legally qualify as a penalty, in which case the relevant clauses could be considered inapplicable. To avoid being qualified as a penalty, the amount of the royalty must represent a true pre-estimate of the loss (i.e. what the violation will actually cost the franchisor).

In addition, you will need to keep in mind bona fide and unfair contractual obligations.

Key points to remember

The new changes to the Franchise Code of Conduct will come into force on July 1, 2021. They worry many franchisors. This is because a key amendment will prevent franchise agreements from containing clauses that expose franchisees to future legal fees that are not quantifiable at the time the agreement is entered into. This means that franchisors could face higher costs for legal services, especially those with large networks.

However, you can improve this by adjusting your pricing model. Another great option is to purchase the LVConnect Pro franchisor subscription. Here you can get legal services for a fixed monthly fee. If you would like more information on changes to the Code or LVConnect Pro, contact Legalvision franchise lawyers at 1 800 534 315 or complete the form on this page.

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