Franchising Legal Update – Spring 2009

    By Nicole J. Harrell, Stephen E. Story, Richard C. Mapp III, Franchising

    Conversions to new Franchise Disclosure Document (FDD) Format

    We have filed (and had approved) FDDs under the new format, which was effective July 1, 2008, for numerous franchisors. We have significantly more experience in franchise registrations than any other firm based in Hampton Roads. For further information, contact Steve Story at (757) 624-3257 or Nicole Harrell at (757) 624-3306.

    Tip for Hotel Licensees

    We have recently represented numerous hotel licensees in successfully and substantially reducing the liquidated damages due upon early termination under their license agreements. Licensees should consult us promptly upon receiving a notice of default or termination letter. For further information, contact Steve Story at (757) 624-3257.

    Lease Renegotiations

    With the recent trends of increased retail and office space vacancies, tenants now have more negotiating strength with landlords who are willing to accept terms they might have rejected a year ago. Landlords are renegotiating the terms of signed letters of intent and leases to give tenants extremely favorable lease terms, including rent abatements (we have seen up to thirty-six months free rent), smaller lease deposits, shorter lease terms and broad permitted use clauses. Even small tenants are able to negotiate provisions which in the real estate boom were often available only to larger or mid-size tenants, including co-tenancy provisions which permit a tenant to terminate its lease or reduce its rent due under the lease in the event anchor tenants or several smaller tenants of a shopping center go-dark, guaranty caps and assignment and sublease rights with minimal restrictions. In this unprecedented market, tenants should be particularly focused on protecting against landlords who are cutting costs or are in danger of losing buildings by insisting that leases include provisions requiring that tenant improvement allowances be held in escrow; rights to perform the landlord’s maintenance and other lease obligations coupled with rent offset rights; and rights to obtain non-disturbance agreements with the landlord’s lenders. For landlord build-outs of significant size, tenants we represent are often requiring that landlords provide letters of credit to secure the landlord’s build-out obligations and reviewing landlord financial statements prior to entering into leases. 

    Use of 401ks to Invest in Start-Up Businesses

    The Internal Revenue Service recently released guidance regarding the common practice of potential franchisees using funds from individual 401k plans for the capital needed to invest in a franchise. This new guidance makes clear that, unless properly structured, these types of transactions can trigger undesirable IRS scrutiny and potential negative tax ramifications. We strongly encourage anyone considering use of this funding mechanism to consult legal counsel to confirm that the plan being used has been structured appropriately in light of the latest IRS guidance. For further information contact Rick Mapp at (757) 624-3285Steve Story at (757) 624-3257, or Nicole Harrell at (757) 624-3306.

    Tip for Franchisees

    Analyze and understand your financial statements. You should understand how they are compiled, their structure and composition, and how they work together. Use your data to produce financial ratios and then interpret those ratios to better understand the causes and effects of financial events in your company.

    New Franchise Registrations

    Kaufman & Canoles recently successfully registered a franchise disclosure document in Virginia for Go Games, LLC, the franchisor of Game On video game retail stores, based in Chesapeake, Virginia.

    Honors and Awards

    Steve Story was recently named to The Best Lawyers in America (Franchising) for 2009, the only lawyer in Hampton Roads to achieve that distinction.

    Nicole Harrell was recently awarded the prestigious Certified Franchise Executive designation by the International Franchise Association. She is the only lawyer in Hampton Roads to attain that designation.

    Presentations and Publications

    Steve Story and Nicole Harrell recently updated the American Bar Association’s Franchise Deskbook, Second Edition, chapter on Virginia franchise law.

    Steve Story made a presentation on “Investing in a Franchise” to St. Patrick’s School Adult Education classes on February 28, 2009.

    Steve Story recently published an article in The Virginian-Pilot, titled “What to do When a Franchising Deal Goes Bad.” The article can be viewed by clicking here.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.