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Ask the Legal Expert - Joseph Adler

Q. Is it true that franchisors are very reluctant to negotiate the terms of their franchise agreements? If so, what is the point of having it reviewed by franchise counsel before having it executed?

A. Many franchisors advise their prospective franchisees that any attempt on their part and their professional advisors to negotiate the franchise agreement will be futile and ultimately resisted. The reason often given by franchisors is that any changes to the franchise agreement will undermine the uniformity of the system. Wide variations in franchise agreements are often viewed as a threat to the integrity and viability of the system.

Of course, there are certain terms and conditions of a franchise agreement that will lend themselves to negotiation and amendment such as the size of the franchisee’s territory, for example. Franchisees should however be judicious in their attempt to negotiate other less important terms and conditions of the agreement. They should recognize that the franchisor will not be amenable to negotiating the entirety of the franchise agreement and should therefore focus on attempting to address the most problematic provisions and significant concerns.

Franchisors are generally reluctant to make amendments to their franchise documents due to the following reasons.

1. Modifications to the standard form agreement could cause administrative difficulties for the franchisor, as it will be required to manage, diarize and monitor several versions of the franchise document. To do so in an effective manner will necessarily increase the operating costs of the franchisor.

2. Allowing variations in the franchise agreement may create dissension among the franchisees should they discover that the franchisor has offered different deals to all or some of its franchisees. Franchisors will wish to avoid claims of favouritism.

3. Consistency is one of the hallmarks of a successful franchise system, and franchisors will most certainly insist on that consistency when negotiating their franchise documentation.

In reality, however, the degrees to which franchisors do in fact negotiate vary from system to system. This general rule of “no negotiation” may not apply, for example, in a start-up franchise system where franchisors are more likely open to negotiating the franchise agreement in the interests of selling their first number of franchises. It may also not apply when the prospective franchisee is bringing much-needed expertise or capital to the table. Yet, even in such circumstances significant modifications to the standard form of the agreement would likely bring short-term benefits and long-term difficulties to the franchisor and the franchise system. A deeper appreciation of the constraints faced by the franchisor in this regard could only assist franchisees and sharpens their approach to negotiating with the franchisor.

At the very least, even if a franchisor is not willing to negotiate any of the terms and conditions of its franchise agreement, it is incumbent upon a franchisee to review its franchise agreement (and disclosure document) with legal counsel so that it fully understands its legal rights and obligations. Failure to do so could be a costly mistake, particularly when a franchisee is not capable or willing to live up to certain of its obligations. Franchisors are also better off when they are informed of the concerns of the prospective franchisee regarding the documentation, even if no changes are ultimately permitted, as such concerns may be indicative of other more significant issues pertaining to the prospective relationship.

Joseph Adler is a partner with the law firm of Hoffer Adler LLP and has been noted by LEXPERT as a leading practitioner in franchise law. Joseph may be reached at 416-977-3444 or jadler@hofferadler.com.