Recent amendments to the California Franchise Relations Act (CFRA) drastically shift the balance of power between franchisees and franchisors. The amendments to the CFRA greatly expand franchisee protections in the event of termination, nonrenewal, and transfer.
The amendments take effect January 1, 2016.
Under the amendments, franchisors must satisfy a tougher standard to terminate a franchise agreement. Franchisors are usually required to show “good cause,” which currently requires a showing that a franchisee failed to comply with a material provision of the agreement. Starting in January, franchisors must show a failure to “substantially comply” with the franchise agreement, a more difficult standard to meet. The amended CFRA also enhances the remedy for wrongful termination, requiring franchisors to pay the fair market value of the franchise business plus damages.
The amendments also eliminate franchisors’ ability to contract for strict transfer refusal rights, instead requiring franchisors to accept any candidate for transfer or sale as long as the candidate meets the franchisors’ pre-existing standards for new franchisees.
The most surprising change is the repurchase obligation imposed after lawful terminations. Effective January 1st, if a franchisor retains control of the franchisee’s property after lawful termination, it must pay the former franchisee the original cost less depreciation of all inventory, supplies, equipment, fixtures and furnishings unless the franchisee fails to transfer clear title or the termination was agreed to. This forces franchisors either to pay a high premium for termination or permit a former franchisee to maintain control of the formerly franchised premises, thereby becoming potential competitors.
How franchisors in California will react to these changes and how transactions will absorb the increased costs is yet to be seen. Check back with us in the new year for more details. If you have immediate concerns, contact our office at (312) 216-2720 or info@marcusboxerman.com to discuss them today.