Recent publicity over SumoSalad's handling of the immediate termination of one of its franchise agreements has highlighted the need for franchisors to be well prepared if, or when, such circumstances arise.
An article in The Age titled 'Big bust up at Sydney's SumoSalad' has reported on the lengths that SumoSalad had gone to in effecting the immediate termination of one of its Sydney based franchise agreements. The end result was two franchised sites being 'boarded up and padlocked' with workers hired by the franchisor dismantling the stores whilst private security guards physically removed the franchisee from the premises.
These actions were taken after several alleged breaches of the franchise agreement. The franchisor stated that their actions were a 'last resort to protect our customers, franchisees and brand' and that SumoSalad's obligations to 'ensure our customers health and safety will not be compromised.'
These events are a timely reminder for franchisors to have appropriate measures in place to effect an immediate termination. The franchisor's file should contain detailed evidence of breaches, notices of breach sent to the franchisee (that comply with the notice provisions of the franchise agreement), results from investigations into the remedial action (undertaken or not), termination notice, fully executed franchise agreement and associated pre-franchise legal documents.
If the franchisor intends to 'lock out' the franchisee from the premises, the franchisor will need to rely on its legal rights in respect to the lease. To achieve this, the franchisor must be the tenant under the lease and the franchisor terminates the franchisee's licence to occupy the premises. Alternatively, the franchisor relies on 'step-in rights' it has entered into with the landlord and franchisee, whereby the lease will be assigned to the franchisor if the franchise agreement terminates.
If a franchisor is considering taking such drastic action, we recommend that it obtains legal advice to ensure it has the right to terminate in the first place. In some circumstances, it may be necessary for the franchisor to take steps quickly to bring the matter to Court for an injunction if, following the termination, the franchisee attempts to continue to operate which may be more of an urgent issue if it is not possible to 'lock' them out of the premises.