The Franchise Memorandum

An appellate court in California recently reversed a grant of summary judgment to a franchisor, finding that the franchisor did not provide sufficient evidence to establish that a landlord was not assigned the rights to one of its restaurant franchises. Cha La Mirada, LLC, v. Red Robin Int’l, Inc., 2017 WL 2691576 (Cal. Ct. App. June 22, 2017). The dispute involved a franchise agreement between Red Robin and La Mirada Restaurant Group (“LMRG”) for the rights to operate a Red Robin restaurant in a hotel. Red Robin, LMRG, and the landlord for the property also signed a consent agreement that assigned to the landlord all of LMRG’s rights in the franchise as partial security for LMRG’s payment and performance under the applicable lease. The hotel was later sold to another company that then transferred the property to its subsidiary, Cha La Mirada (“CHA”). Several years later, LMRG vacated the restaurant premises after CHA served LMRG with a notice to pay rent or quit the premises. CHA then informed Red Robin that it expected Red Robin to recognize CHA as the franchisee of the restaurant. Instead, Red Robin terminated the franchise agreement for abandonment. LMRG sued CHA for breach of the lease, and CHA cross-complained against Red Robin for breach of the franchise agreement. The trial court granted Red Robin summary judgment on CHA’s claims under the franchise agreement, finding that under a “no reassignment” provision in the consent agreement only the original landlord, not successor landlords, was entitled to exercise rights under the consent agreement.

The appellate court disagreed, finding that the consent agreement defined the landlord as the original landlord “and its successors and assigns.” The court rejected Red Robin’s argument that a no reassignment provision in the consent agreement meant that the landlord’s rights could not be reassigned to CHA. The court held that a reasonable interpretation of the provision allowed for the reassignment of the franchise rights to CHA, but not for the reassignment of rights to third parties unrelated to the property or franchise.