FRANCHISING IN UNIQUE VENUES
By Jeffrey A. Brimer
I. WHAT ARE UNIQUE VENUES AND WHY ARE THEY UNIQUE?1
Unique venues may conjure up the thought of exotic or unusual places to locate a franchised outlet. For purposes of this chapter, however, we define unique venues to be sites outside the traditional areas where the franchised outlets have been typically located. Aside from the difference in physical location, these venues are unique for a variety of other reasons: from their appearance and types of products and services offered, to what kind of customers they are intending to serve. Accordingly, this uniqueness affects the laws, rules, and regulations applicable to the placement and operation of such venues, including the franchise registration and disclosure laws.2
The distinguishing characteristics of franchising in unique venues (sometimes referred to as special venues or nontraditional venues) are addressed in this chapter. A franchisor’s basic approach to addressing the numerous legal and business issues discussed in this chapter will differ significantly depending upon whether the unique venue franchisee: (1) owns, manages, leases, or otherwise controls the larger facility within which the franchise would be located (this chapter refers to this type of special venue franchisee as the host); or (2) is a nonhost (i.e., matches the profile of the owner of a franchise located in a traditional site, and has no prior affiliation with the host facility).
A host franchisee is often a large, sophisticated (sometimes publicly owned) corporation. A host franchisee is focused primarily on the impact the unique venue franchise will have on the host facility business, even if the franchise itself is not profitable.
A nonhost franchisee is often the classic “Mom and Pop” closely held company. A nonhost franchisee is solely focused on the success and profitability of the unique venue franchise, without direct concern as to impact on the host facility.
Some unique venue franchises feature one additional level of complexity—dual franchisee status. For example, XYZ Corporation is the franchisee of the host facility (e.g., a hotel) and then also becomes the franchisee of a unique venue franchise located within the host facility.
The uniqueness of a location, and whether it is best characterized as a nontraditional venue, may vary based upon the type of franchise. For example, while a food court in a shopping mall may not be unique to some fast-food restaurant franchises, it may be unique to other types of franchises, such as a drugstore franchise. Some franchisors do not have traditional free-standing, shopping mall, or strip-center–type locations, so, it may only franchise in unique venues.
II. WHAT MAKES UNIQUE VENUES DESIRABLE?
There are several reasons why unique venues are desirable for franchisors and franchisees.
A. EXTENDS THE BRAND TO PLACES CUSTOMERS WANT IT TO BE
The demands on our time are growing. Whether from longer hours spent at work, or the desire to spend more quality time with our families, or the increased commute time from home to work, we always seem to be running out of time. As consumers, we look for opportunities to combine activities or simply save time. Therefore, if we can buy our coffee in the lobby of our office building, have lunch delivered to us at the office, or purchase our favorite sandwich while watching a baseball game, we can use the time we save to devote to other demands. In addition, as we saw during the recent economic slowdown, especially when new home construction also slows, there may be less expansion of communities. This can lead to fewer new traditional retail locations being constructed to service those areas.
1. SERVES AS AN AMENITY TO FRANCHISEE’S EXISTING CUSTOMER BASE
Operators of certain types of facilities may want to offer additional products or services to their customers, but do not have the skills or knowledge to operate these types of businesses. For example, a sports facilities operator may want to increase sales of food to the fans that attend the sporting event. By obtaining rights to certain franchises, it can sell food products offered by these franchises that the fans know and like. Of course, one of the most ubiquitous examples of this situation is the Starbucks® coffee shop in a hotel. These outlets have become so common that many travelers have grown to expect them to be located at the hotels they use.
2. ACCRETIVE/POSITIVE BRAND ASSOCIATION
We all know the saying “you’re known by the friends you keep.” The same applies to the sale of goods and services through franchised outlets. By locating in unique venues, the unique venue franchisor, franchisee, and host franchisor can rely on each other’s reputations to enhance the value of their own brands and business.
3. OPENS UP NEW FRANCHISE SALES OPPORTUNITIES
In some situations, prime locations may already be taken by existing outlets or competitors. In other situations, available sites are controlled by users who see the outlet as a way to support the primary activity of their site. This would include hotels, resorts, stadiums, and military bases. As franchise systems start to saturate their markets, fewer opportunities arise for placing new units in that market. If the franchise agreement has adequately reserved to the franchisor the right to place units in unique venues in a franchisee’s territory, the franchisor can then grant additional franchises to either the franchisee of that territory, or to another franchisee and not breach the existing franchise agreement.3 Furthermore, the cost of opening a unit in a unique venue may be substantially less than the cost of a traditional unit, thereby opening up the franchise to prospective franchisees who had not previously qualified.
B. WHAT ARE THE UNIQUE REALITIES OF THESE VENUES?
As mentioned above, the attributes of unique venues are different from traditional locations. Specific attributes of certain types of unique venues are discussed in more detail in Sections III, IV, and V. The following are some of the differences that transcend many of these venues.
1. SPACE CONSTRAINTS IN STORE AND SHARED BACK OF THE HOUSE
Often, due to space constraints in the venue, the size of the space occupied by the franchise is smaller than the traditional location. The location may also share back-of-the-house facilities, such as shipping and receiving, with other users. The food-court restaurant in a mall is a perfect example. In this situation, the restaurants are usually smaller than a standalone facility because each restaurant does not need its own dedicated seating and other support facilities. They may also share central beverage dispensing, assuming they all offer similar beverage products, and waste disposal.
2. LIMITED PRODUCT OFFERINGS
The franchise may not be able to offer the full range of products or services that are offered by a traditional location because of limited space. Restaurants, for example, may not offer a variety of products simply because they do not have the facilities to prepare all the same products that can be prepared in a traditional location.
3. NEED TO CARVE OUT FROM TRADITIONAL TERRITORIAL GRANTS—RESERVATION OF RIGHTS TO NONTRADITIONAL MARKETS
The commonly used, all-encompassing, protected territory grant in traditional franchise agreements may prove to be a substantial impediment to granting franchises the opportunity to operate in unique venues.4 To be able to grant franchises to third parties to operate in unique venues, the franchise agreement used for traditional venues will need to have additional terms, including the reservation of rights to operate in unique venues and offer products and services in other alternative channels of distribution, even within the protected territory granted to the traditional franchisee. Likewise, the franchise agreement for a unique venue will need to restrict the territorial rights of the franchisee sufficiently so that the placement of a traditional franchise nearby, with another franchisee, will not be contractually prohibited.5 Of course, if the same franchisee is the operator of both the traditional and unique venue franchise, then other issues arise, such as providing the right to transfer each franchise independently of the other.
4. NONTRADITIONAL FRANCHISEE OR HOST
When the owner or operator of the unique venue has some other primary business that it conducts in the facility, this type of franchisee will be different from traditional franchisees. For example, if the franchisee is the hotel owner or operator, private sports facility owner, the government, a government agency, or commission, this type of franchisee will not be devoting all of its time and attention to the development of the franchise, but will be enhancing the value of its other business. Where the franchisee is a traditional franchisee operating in a unique venue owned by the host, then the franchisee will have to recognize the unique needs of the host that will differ from a traditional landlord.
III. APPLICATION TO UNIQUE VENUES
A. DO DISCLOSURE AND REGISTRATION REQUIREMENTS APPLY?
Simply because a franchise is located in a unique venue, it does not mean that the federal and state franchise disclosure and registration obligations do not apply. While the characteristics of a franchise in a unique venue may be very different from the characteristics of one located on a more traditional site,6 the definitional elements of a franchise under federal and applicable state law must be examined in each case.7 Unless one of those definitional elements is missing or an exemption or exclusion from the disclosure or state registration laws applies, then disclosure must be provided to the prospective franchisee and, where applicable, the franchise must be registered with the appropriate state agency before entering into the franchise relationship. A full examination of the disclosure and registration obligations is well beyond the scope of this chapter.8 What we will focus on, however, is how the disclosure requirements for a Franchise Disclosure Document (FDD) prepared under the Franchise Rule9 and NASAA Franchise Registration and Disclosure Guidelines10 issued in June 2008 (the UFDD Guidelines) differ for franchises in unique venues and whether any exemptions or exclusions from the disclosure or registration requirements apply.
Whether a franchise in a unique venue should be disclosed in the existing FDD that includes the traditional location, in a separate FDD, or in a supplemental disclosure will depend upon the extent of differences between the two concepts. More often than not, the additional information that will need to be disclosed for the unique venue will not be too extensive or differ too much from the traditional venue. This can make it confusing to combine the different venues into a single FDD. Of course, separate FDDs will entail separate registrations and the fees and costs associated with separate registrations.
B. HOW DO THE DISCLOSURE REQUIREMENTS DIFFER FOR UNIQUE VENUES?
Most of the disclosure obligations under the Franchise Rule and UFDD Guidelines will remain the same because the information to be provided to prospective franchisees in these items is not dependent upon the characteristics of the venue.11 However, the information required to be provided in some items will have to be changed and others may have to be changed based on the type of franchise system and the requirements imposed on the franchisee. This can be accomplished by using either a different form of FDD to address the different information that has to be provided for a unique venue12 or, where applicable, separate disclosures and tables. In addition, where an exemption from disclosure is available—such as if the fractional franchise or sophisticated franchisee exemption applies—no FDD is required to be provided to the prospective franchisee at all.13
C. ITEM THAT DEFINITELY CHANGES—ITEM 7
Assuming the franchise disclosure laws are applicable to the unique venue,14 a franchisor will need to address the different estimated initial investment to establish the franchise in the unique venue in Item 7 of its FDD because the physical characteristic of the venue will differ from the traditional location. The types of estimated initial investment or costs that will change can include virtually every category of cost required to be disclosed, including the initial franchise fee if the franchisor chooses to have a different fee apply to the type of unique venue it is offering.15 The most likely costs to be different in a unique venue include real property, leasehold improvement costs, and furniture, fixtures, and equipment costs. Because so many costs may differ, a separate table for the unique venue may make it easier for the prospective franchisee to understand the estimated investment rather than trying to explain the differences through footnotes to a single Item 7 table that shows a range of costs.
Part of what makes a unique venue is that it is in a facility primarily used for another purpose, such as a mall, hotel, stadium, airport, or military base.16 Therefore, when the franchisee in a unique venue is not the owner of the real property from which the franchise is operated, the franchise will likely be leasing the space used for the franchise. The structure and costs of these leases will differ from the leases in a traditional shopping or strip center. For example, as discussed in more detail below, when the lessor is a government agency or the military, certain prevailing wage requirements may apply that are not present in traditional leases with shopping center owners. This can affect the costs of operation.
Because the venue will often be smaller than a traditional location, the costs of leasehold improvements and furniture, fixtures, and equipment will be different, although not necessarily less. It may be more expensive to perform leasehold improvements in the unique venue. Facilities such as airports and stadiums are commonly owned by government agencies and may require the use of union labor. The cost of delivering the materials needed for the leasehold improvements and the furniture, fixtures, and equipment may be higher because the venue has a more restricted access. Certain venues may only allow construction to take place while they are closed or during off-peak hours so other venues and customers are not inconvenienced. The venue may also require different types of furniture, fixtures, and equipment than the traditional location. The franchisor will need to determine these costs or the estimated ranges of these costs and disclose them in the FDD.
D. ITEMS THAT MAY CHANGE
Some other items in an FDD may change because of the characteristics of the venue or because of the type of franchisee. Other changes may be required if the franchisor decides to make changes to its franchise agreement, operations manual, or policies, because the needs or requirements of the venue differ from a traditional location.
1. ITEM 5—INITIAL FEES
If the franchisor charges different initial fees or has different refund policies for different venues, then Item 5 will need to reflect the appropriate initial fees and refund policies for each venue. If the initial fees vary depending upon the type of venue, then the franchisor must disclose the range or formula used to determine the initial fees and other factors that it uses to determine the initial fees.
2. ITEM 6—OTHER FEES
For franchisors that charge different fees for different venues, Item 6 will need to reflect the appropriate other fees for each venue. If the fees for the other venue differ significantly from the fees for a traditional venue, then the franchisor may want to consider using a separate table to disclose the fees applicable to the traditional and unique venues. Types of fees that may vary include the ongoing royalties, advertising fees, fees charged for site and construction approval, and training. If fees must be paid to third parties, these should also be disclosed. These include both fees paid to affiliates of the franchisor and fees paid to suppliers and vendors that the franchisee must use. If the due date or other factors that would be included in remarks or footnotes are different, these should also be explained.
3. ITEM 8—RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES
The construction of the facility in a unique venue may be subject to different requirements than a traditional location. The franchisee may need to acquire furniture, fixtures, equipment, or other supplies from suppliers other than the franchisor’s designated or approved suppliers. If so, then the franchisor will need to disclose the process the franchisee must follow to obtain approval of its suppliers. If the franchisor will provide specifications or standards that the franchisee must provide to its suppliers, then this will also need to be included in Item 8.
4. ITEM 9—FRANCHISEE OBLIGATIONS
If a different form of franchise agreement is used by the franchisor or if any of the franchisee’s obligations required to be disclosed in the Item 9 table are included in different parts of the franchise agreement, then this must be appropriately noted in the table. The franchisor may consider using a separate table for the unique venue, especially if a different form of franchise agreement is used or there is an addendum or supplement to the standard franchise agreement that changes a significant number of the terms of the franchise agreement.
5. ITEM 10—FINANCING
If the franchisor offers financing to franchisees in traditional locations but not to franchisees in unique locations or offers different terms to the franchisees in unique locations, these differences must be disclosed in Item 10.
6. ITEM 11—FRANCHISOR’S ASSISTANCE, ADVERTISING, COMPUTER SYSTEMS, AND TRAINING
Because of the different needs of the franchisees in unique venues, there could be significant changes to the information required to be disclosed in Item 11. This could include different assistance provided before opening, such as site selection assistance, and differences in computer systems, training programs, and participation in advertising programs.
7. ITEM 12—TERRITORY
Territorial rights granted to franchisees in unique venues may be much more limited than the rights granted to franchisees in traditional locations. Because the franchisee in a unique venue may be serving a clientele whose primary reasons for visiting that location is other than purchasing products from the franchisee (e.g., a hotel stay), the franchisor may grant or restrict rights to operate outside of the facility where the unique venue is located. Since these rights may be different from the rights granted to traditional franchisees, the differences in the territorial rights must be disclosed.17 If the franchisor is also one of the advertisers in the unique venue, the franchisor should disclose that it has the right to advertise in the facility, especially if it will be advertising locations outside of the facility. Likewise, if the franchisee will have limited or no ability to service customers outside of the facility (e.g., home delivery from pizza restaurant), because of a restriction on the franchisee’s rights to solicit orders outside of its territory, this restriction must also be disclosed.
8. ITEM 15—OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS
It may not be practical for a franchisor that requires its franchisees in traditional locations to participate actively in the operation of the business to require franchisees in unique venues to do the same. The nature of the location may make it more difficult for the franchisee to be present on a full-time basis. For example, in venues such as sports facilities and airports, the franchisee may actually be operating more than one location within the facility so he or she simply cannot be at each location on a full-time basis, but may be in the facility, roaming between the locations.
9. ITEM 16—RESTRICTIONS ON WHAT A FRANCHISEE MAY SELL
Franchises in unique venues may have a more limited product or service offering than the traditional location. This can be the result of a smaller footprint, which prevents the franchisee from being able to offer all of the same products or services as one in the traditional location will offer. It can also arise because the host also sells similar products as the franchisee, and does not want to compete with the franchisee for the same consumers. Therefore, if the franchisee is not allowed to sell the full line of products or services offered by the franchisor from the unique venue, the restrictions should be disclosed in Item 16.
10. ITEM 17—RENEWAL, TERMINATION, TRANSFER, AND DISPUTE RESOLUTION
To the extent that the franchise agreement for the unique venue has differences from the franchise agreement for the traditional venue, the information disclosed in Item 17 must be appropriately modified. This includes the term of the franchise, renewal terms, termination, transfer, noncompetition, or other provisions. If the differences are significant, this is usually done by a separate table in Item 17. If the changes are not significant, the differences can be noted in the Item 17 table.
11. ITEM 19—FINANCIAL PERFORMANCE REPRESENTATIONS
The more expanded opportunities for providing financial performance representations now allows franchisors to make better representations for different types of franchised outlets. Under the new FTC Franchise Rule and UFDD Guidelines, a franchisor can make a representation about a subset of outlets. So, for example, a financial performance representation about outlets in stadiums would be permissible, as long as the franchisor had a reasonable basis for making the representation.18 On the other hand, if the franchisor provides a financial performance representation based on its traditional locations and now offers franchises in unique venues, it will have to disclose that the financial performance representation may not be applicable to the unique venue.
12. ITEM 22—CONTRACTS
If the franchisee in a unique venue must sign a different form of franchise agreement or additional contracts, addendums, supplements, subleases, guarantees, or additional agreements, these agreements will have to be listed in Item 22.
IV. EXEMPTIONS AND EXCLUSIONS
Even if the relationship between the franchisor and franchisee meets the definitional elements of being a franchise, disclosure and registration may not be required if the characteristics of the franchise or the franchisee qualify for an exemption or exclusion. This section will examine exemptions and exclusions applicable to unique venue franchises at both the federal and state level.
A. FRACTIONAL FRANCHISING
1. WHAT IS IT AND WHY DOES IT WORK WELL IN UNIQUE VENUES?
The fractional franchise exemption under the Franchise Rule19 is an exemption from disclosure obligations. In many situations, the franchisee of an outlet in a unique venue is not a typical franchisee who intends to invest a substantial amount of his or her resources in the franchise, who will devote all or substantially all of his or her working time to operating the franchise, and who needs the guidance of the franchisor to operate the business. Many of these franchisees are sophisticated, experienced operators of similar types of businesses. Accordingly, the relationship is considered a fractional franchise if: (1) the franchisee, any of the franchisee’s current directors or officers, or any current directors or officers of a parent or affiliate, has more than two years of experience in the same type of business; and (2) the parties have a reasonable basis to anticipate that the sales arising from the relationship will not exceed 20 percent of the franchisee’s total dollar volume in sales during the first year of operation.20
2. PROS TO EMBRACING FRACTIONAL FRANCHISING
The primary advantage of the fractional franchise exemption is that the franchisor does not have to provide an FDD to the prospective franchisee either before signing a franchise agreement or if the franchisor wants to modify the offered terms unilaterally and materially under a particular franchise agreement or to a particular franchisee.21 It also may serve to maintain the confidentiality of the terms and conditions of the agreement, if that is a concern to the parties. Not only does this save substantial costs, because the franchisor does not have to prepare and update the FDD, but the fourteen-day and seven-day waiting periods are also eliminated, allowing the transaction to proceed at its own pace. The franchisor can also provide financial information about the past performance and expected future performance of the franchise without having to comply with the disclosure requirements of the FDD and UFDD Guidelines.22 As noted above, the franchisee in a unique venue may not be the typical franchisee of a traditional venue. Such franchisees have the experience and financial resources not to have to rely upon the FDD to obtain the necessary information to decide whether to enter into the franchise or not. The elimination of the need to provide an FDD also allows the franchisor to provide, subject to the anti-fraud requirements of the Federal Trade Commission Act and similar provisions of state law, information requested by the franchisee that may not be included in an FDD.
If a state fractional franchise exemption is available in states that require registration before offering a franchise in that state,23 then the registration requirement is also eliminated.24 Not only does this save costs, but it can also save a substantial amount of time for the franchisor that is not registered to offer franchises in the state. The process of registering in some states can usually take months. Operators who are not accustomed to dealing with the franchise registration process or who have certain time-critical needs may not want to wait for the registration process to be completed, and many move to other opportunities.
3. CONS TO EMBRACING FRACTIONAL FRANCHISING
Although the parties may have a freer hand in sharing information, the risk of not providing a disclosure document is that the franchisor can no longer rely on the disclosures provided in the FDD to claim that the franchisee was or should have been aware of the information that would have been disclosed in the FDD. If a franchisor has an FDD and is registered in the state, then most franchisors will provide the FDD, even if not required. Another con to fractional franchising is that determining if a potential franchisee qualifies for the fractional exemption will require judgment calls to be made: for instance, is the franchisee’s experience sufficient or really in a “like” business? Is the determination of the 20 percent really a reasonable estimation? Having an FDD eliminates having to weigh these kinds of factors.
4. STATES WHERE FRACTIONAL FRANCHISING DOES NOT WORK
The fractional franchise exemption is not available in all states that require registration of the franchise offering.25 Rhode Island, Maryland, and Hawaii, however, have statutory authority that allows the state agency responsible for registering franchises to grant exemptions on a case-by-case basis.26 In addition, other exemptions may be available, such as the sophisticated franchisee exemption for companies like HMS Host, which operates restaurants in airports and other facilities.
B. LARGE INVESTMENT FRANCHISE
A new addition precipitated by the recent changes to the Franchise Rule exempts transactions in which “[t]he franchisee’s initial investment, excluding any financing received from the franchisor or an affiliate and excluding the cost of unimproved land, totals at least $1 million and the prospective franchisee signs an acknowledgment verifying the grounds for the exemption.”27
Because this exemption currently requires at least $1,084,900 (which amount will be adjusted every fourth year to reflect changes in the Consumer Price Index) to be invested, many franchises—especially those that have a more limited product or service offering—may be unlikely to meet that threshold. Another drawback to the application of this exemption is in situations in which the franchisee is an entity. In that case, if no one single individual in the investor group is making the minimum investment, then the exemption will not apply. Therefore, this exemption will have limited use in many unique venue situations.
C. SOPHISTICATED FRANCHISEE EXEMPTION
Another new exemption added to the Franchise Rule, which has existed in a different form in some states as an exemption from registration, provides for an exemption from the rule if: [t]he franchisee (or its parent or any affiliates) is an entity that has been in business for at least five years and has a net worth of at least $5,424,500 (which amount will be adjusted every fourth year to reflect changes in the Consumer Price Index).28 The key element of this exemption is that it is available only to entities and not to individuals.29
In most of the situations in which the franchisee is the owner of the unique venue, such as the owner of a stadium or hotel, the entity requirement will be met. Whether it can also meet the net worth and experience requirements will be based on the facts and circumstances of the situation.
The exemption applies in all states that do not require registration and similar exemptions are available in some registration states that have adopted their own form of sophisticated investor exemption.30 For example, in California the sophisticated franchisee exemption is also an exemption from registration.31 It also applies to entities with a net worth of $5,000,000, but does not require the five years of existence.32 It also applies to individual franchisees that have certain levels of net worth or annual incomes.33
D. OTHER EXEMPTIONS AND EXCLUSIONS APPLICABLE TO UNIQUE VENUES
In cases in which the franchisor may be the operator of the location, the parties may structure the relationship as a lease of space in the venue to the franchisor, instead of structuring the relationship as a franchise. This type of relationship would fall within the “leased department” exemption to the Franchise Rule.34 The keys to the availability of this exemption are that the franchisor would have to operate the business and the lessor cannot purchase any goods from the franchisor or any third party it designates.
The process described in connection with the fractional franchise exemption, obtaining a ruling from the applicable regulatory agency that the relationship is exempt from the state’s franchise registration and disclosure requirements, can also be used for other types of relationships that the parties feel do not need the protections of the state franchise laws.
For example, several states exempt out-of-state franchises sold by franchisors based in their states to franchisees in other states from registration.35 This, of course, does not exempt the franchisor from registration and disclosure in the state where the franchisee is located.
V. CONSIDERATIONS FOR HOTELS
Hotels are providing an opportunity for franchise locations in unique venues. Hotels are captive venues in varying degrees. Some hotels may cater to people on brief stays and business travelers, while other hotels and resorts may be large destination locations where available retail, service, and food and beverage options are truly limited by geography. A franchise concept within a hotel can serve as an amenity to the hotel’s clientele; some logical concepts may include food and beverage, beauty and spa services, and car rental.
A. COMPLEX OWNERSHIP STRUCTURES
Many hotel chains are themselves franchise concepts and the sometimes complicated ownership and operational structures can present challenges for the franchisor. Within the hotel landscape there are several options for a franchise relationship. In one scenario an individual or entity is a franchisee of a hotel chain and owns and operates the hotel location. Another scenario is that the owner of the hotel may contract with another entity (sometimes a division of the hotel franchisor itself) to manage the hotel. Some hotels may further split the operational responsibilities so that one entity is responsible for the hotel operations and another is responsible for the on-site retail and food and beverage concessions. Additionally, some potential franchisees may simply be lessees of space within a hotel. Any one of these entities may be a viable franchisee and structuring of the franchise agreement needs to account for the potential variations of the owner/operator split. For instance, if the franchisee is the operator of the hotel’s food and beverage concessions under a management agreement, and that management agreement expires or is terminated by the hotel owner, what will happen to the franchised concept?
B. OWNER/OPERATOR SPLIT
When there is a split between ownership of the location and operation of the franchised concept, one consideration in structuring the relationship is to execute a separate coordination agreement to deal with important issues that are affected by the owner/operator split. If the franchisee is the operator of the hotel, a coordination agreement with the owner is advisable for several reasons. First, the hotel owner may have access to confidential information of the franchisor and should agree to standard confidentiality terms. Second, the owner will be in control of access to the site, and the coordination agreement should provide that in the event the franchise agreement is terminated or expires, the owner will allow the franchisee to perform its post-termination obligations under the franchise agreement, such as de-identification of the franchised site, and should also allow the franchisor the right to enter the premises to complete de-identification, should the franchisee fail to do so.36
C. TRANSFERS OF OWNERSHIP
The hotel industry has seen a fair share of merger and acquisition activity in recent years. A purchase and sale of a large hotel property is usually a multimillion dollar deal. The franchise operation comprising a relatively minimal component of the overall acquisition may be an afterthought in some instances. Careful drafting of the transfer and change of control provision of the franchise agreement at the outset is advisable.
D. FLAG CHANGES