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The Franchise Memorandum

California AB 525 Creates Myriad Problems for Franchisors, But Some Can Be Addressed With Franchise Agreement Revisions

As we reported in Issue No. 198 of The GPMemorandum, AB 525, which amends the California Franchise Relations Act ("CFRA"), applies to all franchise agreements entered into or renewed after January 1, 2016. Under the amendments, franchisors that prevent a terminated or nonrenewed franchisee from "retaining control of the principal place of the franchise business" will be required to purchase the franchisee's assets. One issue raised by this new provision is whether language in franchise agreements, conditional lease assignments, or leases that gives a franchisor certain approval rights with respect to the franchise premises will be considered to have deprived a franchisee of "control."

AB 525 vaguely outlines the terms of the franchisor's repurchase obligation but provides no practical guidance about how to comply with the requirement. For example, franchisors must purchase from a franchisee who is terminated in compliance with the CFRA the assets of the franchise business "at the value of the price paid minus depreciation." If the franchisor does not know the identity of each of the franchisee's assets, the price paid by the franchisee, or the extent to which those assets have depreciated, how will it know the base compensation to offer?

Only by establishing standards for reporting on the date of purchase and acquisition costs of each asset and by setting depreciation standards in the franchise agreement and manuals can franchisors be prepared for this eventuality and have some understanding of what the cost of a termination might be before sending a notice.

In addition, when a franchisor receives a request for approval of a sale or transfer of a franchise, AB 525 requires the franchisor to notify the franchisee within 15 days of the franchisor's then-current standards for "approving new or renewing franchisees." The franchisor will be prohibited from refusing to approve a transfer if a proposed transferee is in compliance with the standards, even if other previously unarticulated standards for denial exist. Moreover, the franchisor may be required to prove that the standards invoked for the disapproval of a transfer have been consistently applied to similarly situated franchisees.

How can a franchisor meet this burden within 15 days if it has not already prepared the standards and developed records of previous rejections of new or renewing franchisees? By preparing written standards now, franchisors can be prepared to meet the two-week deadline.

Gray Plant Mooty has identified at least 50 issues that arise from the language of AB 525, and has developed a template that can be used to prepare transfer standards. On December 9, 2015, the firm hosted a webinar on how to comply with AB 525. The recorded webinar and slides are available here:

For a copy of the issues memo or transfer template, contact any member of Gray Plant Mooty's Franchise and Distribution Practice Group.

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The information contained in this post is provided to alert you to legal developments and should not be considered legal advice. It is not intended to and does not create an attorney-client relationship. Specific questions about how this information affects your particular situation should be addressed to one of the individuals listed. No representations or warranties are made with respect to this information, including, without limitation, as to its completeness, timeliness, or accuracy, and Lathrop GPM shall not be liable for any decision made in connection with the information. The choice of a lawyer is an important decision and should not be based solely on advertisements.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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