Franchisors more and more are implementing mandatory re-imaging, remodeling, and refurbishment programs as they look to reinvigorate their systems, increase market share, and boost unit sales. These programs often involve substantial capital expenditures, strict deadlines, and disruptions to business operations. Franchisees may be hard pressed to find the desire or capital to fund such projects, particularly when faced with the requirement to address multiple outlets at the same time. This, in turn, can dramatically impact a franchisor’s ability to successfully implement its plans for the system. Franchise counsel can play a significant role in helping franchisors and franchisees avoid conflicts and work cooperatively to implement re-imaging, remodeling, and refurbishment programs.

Counseling Franchisors

From the franchisor’s perspective, the Franchise Disclosure Document (“FDD”) and franchise agreement should specifically address the right to implement re-imaging, remodeling, and refurbishment requirements and should give the franchisor broad, explicit rights and controls over these matters, to avoid complications and impediments years later. From a practical standpoint, counsel should advise franchisor clients implementing such programs to consider issues such as these:

• Is the program consistent with the provisions of the franchise agreements across the system?
• Have the franchisees bought into the program from a business perspective – based, for example, on return on investment from prior programs involving company-owned outlets?
• Can accommodations be made to help franchisees with implementing the program, including, for example, financial incentives or financing?

If remodeling is anticipated without closure of the outlet during construction, there may be additional concerns. For example, clients should be counseled to consider and assess local health and safety issues and ordinances and to develop programs that minimize business interruption and customer inconvenience.

Finally, franchise counsel should carefully assess whether the program to be implemented violates any state relationship laws. For example, does the re-imaging or refurbishment plan constitute an “unreasonable standard of performance” on the franchise under the New Jersey Franchise Practices Act? A careful assessment and analysis of each of these issues is imperative before implementing a re-imaging, remodeling, or refurbishment program.

Counseling Franchisees

Similar considerations apply when counseling franchisees about re-imaging, remodeling, or refurbishment programs. Counsel for prospective franchisees should consider whether limitations and modifications to the franchise agreement concerning re-imaging, remodeling, and refurbishment can be negotiated. When negotiating franchise agreements, counsel should consider issues such as:

• How often may such projects be required?
• Will there be any cap on the expenditure required?
• Will any creative means of funding (such as deferred royalty payments or reduction in advertising fund contributions) be offered to offset any of the expense?

Franchisee counsel whose clients are faced with re-imaging projects should also analyze whether the program being implemented is permitted under the terms of the client’s franchise agreement and whether it violates applicable state relationship laws. For example, if the project is contemplated for Minnesota franchisees, counsel should evaluate whether it runs afoul of the Minnesota Franchise Act, Rule 2860.4400(G), which prohibits a franchisor from imposing “any standard of conduct that is unreasonable” on a franchisee.

Re-imaging, remodeling, and refurbishment programs are becoming more and more common, and in a tough economy, they are likely to be more and more controversial and contentious. Franchise practitioners should work proactively to counsel and assist clients on issues that arise as they draft and review their FDDs, as they draft and negotiate franchise agreements, and as they prepare to implement such programs.