Is a Franchisor Entitled to a Release Upon Renewal?

Vol. 17 No. 1

By

Trenten P. Bausch, Cline Williams Wright Johnson & Oldfather, L.L.P.

John D. Holland, Dady & Gardner, P.A.

Renewal of the term of a franchise agreement provides an opportunity for the franchisor and franchisee to evaluate their relationship and determine whether the relationship should continue. Franchise agreements typically contain conditions the franchisee must satisfy to renew the franchise agreement, which the franchisor treats as consideration for the renewal. Among these are: the absence of uncured defaults both when the franchisee gives notice of renewal and at the beginning of the renewal term; the franchisee’s execution of the then-current form of franchise agreement being offered by the franchisor to new franchisees; the franchisee’s payment of a renewal fee; and the franchisee’s remodeling or refurbishing of the franchisee’s location to meet the franchisor’s current standards. This article focuses on another renewal condition often required by franchisors: the release by the franchisee of any legal claims against the franchisor.

The release requirement enables the franchisor to determine that the franchisee is satisfied the franchisor has fulfilled its obligations under the franchise agreement. From the franchisor’s perspective, this requirement, in effect, permits a reset or fresh start of the franchise relationship, with the franchisor benefitting from the knowledge that the franchisee is satisfied with that relationship and the franchisee making a determination that the benefits of the relationship outweigh any problems with the franchisor.

In many instances, a franchisor will be aware when a franchisee is unhappy. But at other times, the franchisor may not realize the franchisee is dissatisfied with a franchisor’s product or service rollout, franchise services, or other aspect of the relationship. The franchisee may be reluctant to confront the franchisor regarding an issue, may believe that a dialogue with the franchisor will serve no useful purpose, or may believe the franchisor’s acts and omissions have not risen to the level of a cognizable default by the franchisor. The release requirement may make the franchisee more willing to confront the franchisor, which may result in a resolution of the issue.

The release requirement compels the franchisee to determine whether its complaint with the franchisor has risen to the level of a legal claim that would be extinguished by signing a release. The franchisee must decide whether to continue a difficult franchise relationship during the pendency of the renewal term, which can be five to ten years, or decline to renew. At a minimum, a release requirement forces the franchisee to make a cost-benefit analysis of whether to continue the relationship or end it and comply with the post-expiration requirements of the franchise agreement.

Franchisees are, consequently, well advised to promptly pursue resolution of legal claims against the franchisor so that such claims are fully resolved before the franchise term expires (so that when the franchisor insists on a release of unresolved claims as a condition of renewal, there are no such claims to be released).

If the franchisee has potentially viable legal claims against the franchisor that have not been resolved as of the expiration of the term of the franchise agreement, the contractual obligation to execute a release as a condition of renewal requires the franchisee to make a difficult choice. The franchisee may be forced to waive all existing legal claims against the franchisor or pursue such claims at the expense of the opportunity to renew. The franchisee is effectively forced to put its entire investment in the franchise at risk in order to pursue a legal claim against the franchisor. This is so because most franchise agreements include covenants against competition that preclude the franchisee from operating a similar business when the franchise term expires, absent renewal of the franchise relationship.

Franchise Relationship Laws

Fortunately, from the franchisee’s perspective, at least 18 states have enacted franchise relationship statutes that may impact a franchisor’s ability to refuse to renew a franchise agreement. See David L. Steinberg and Jyotsna Balakrishnan, “What Do You Mean I Can’t Renew?”, THE FRANCHISE LAWYER (Summer 2013). Anti-waiver language in these statutes, as well as in the Petroleum Marketing Practices Act, 15 U.S.C. § 2805(f), may limit the franchisor’s ability to require a release as a condition to renewal.

For example, the anti-waiver provision of the Minnesota Franchise Act, Minn. Stat. § 80C.21, provides that any contractual “condition, stipulation or provision … which has the effect of waiving compliance with any provision of sections 80C.01 to 80C.22 or any rule or order thereunder is void.” Such statutory anti-waiver language may effectively “trump” any contractual obligation for the franchisee to execute a release of its legal claims as a condition of renewal where state statutes provide the franchisee a right to renew unless the franchisor has a “good cause” basis for declining to renew. See, e.g., Minn. Stat. § 80C.14, subd. 4 (providing the franchisee a statutory right to renew).

As discussed in Tatan Management v. Jacfran Corp., 270 F. Supp. 2d 197, 205-06 (D.P.R. 2003), a franchisee may be able to use statutory anti-waiver language to avoid the contractual obligation to execute a release as a condition of renewal. But the franchisee must be careful to have honored all other lawful contractual conditions of renewal. In Tatan, the franchisee’s failure to “comply with some of the other, lawful renewal conditions” (such as failing to submit the renewal fee and perform required renovations) constituted a “good cause” basis for the franchisor’s non-renewal of the franchise, even though the franchisor had presented the franchisee with an unlawful demand for a release. Id. at 206.

Franchisees must also be cautioned against signing a renewal agreement that incorporates a release “under protest” based on an expectation that a reviewing court will decline to enforce the release on statutory grounds. As discussed in Santiago-Sepulveda v. Esso Standard Oil Co. (Puerto Rico), Inc., 634 F. Supp.2d 201, 207-08 (D.P.R. 2001), some courts require that a franchisee “faced with objectionable [release] terms refrain from ratifying those terms by executing contracts (even ‘under protest’)” if the franchisee intends to rely on statutory anti-waiver protections.

Statutory limits on releases raise other issues as well, including: whether limitations on releases extend only to franchise act claims; whether these limitations protect only prospective franchisees or also cover existing franchisees; and whether they preclude only prospective releases. For further discussion of these issues, see Nicole Liguori Micklich and Michael V. Pepe, Can’t Give It Away: Statutory Prohibitions That Protect Franchisees From Releases, 30 FRANCHISE L.J. 144 (2011).

Franchisees may also seek to void releases executed upon renewal on contractual grounds. For example, franchisees may allege that contractual release agreements are unenforceable for lack of consideration. See, e.g., Santiago-Sepulveda, 64 F.3d at 8 (discussing argument that a franchisee’s release executed as a condition of renewal may fail “for want of consideration”). Franchisors, in turn, may address this contention by providing additional consideration to the franchisee in connection with a renewal. Alternatively, franchisors may pay reasonable amounts to resolve any pending disputes with a renewing franchisee. Such payments could be in the form of reduced renewal fees. Franchisors may also consider providing remodel incentives, additional territories, or rights of first refusal to territories as additional consideration for renewals.

In the end, both franchisors and franchisees are well-served to focus on renewal long before the end of the term of their agreements.

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