Franchising after Covid-19: The ‘New Normal’

Roz Goldstein has been assisting the bfa in delivering a number of webinars covering Covid-19 related content. During her most recent presentation on the 9^th of June, Roz explored likely post-pandemic changes to franchise agreements and suggested measures franchisors should consider to continue moving forward at this time.  Covid (or the risk of some other coronavirus) will remain a threat for at least the foreseeable future. Rather than expecting the world to go back to exactly where it was before, we are all now planning for the ‘New Normal.’  What does this mean for franchise agreements?

Franchise Agreement Changes

The Covid crisis has shone a particular spot-light on certain franchise agreement provisions that up to now have been taken rather for granted. ‘Force majeure’ provisions are the biggest example.

Force majeure clauses permit either the suspension or termination of contractual obligations by one or either party should an ‘unforeseen event’ occur that prevents performance of the contract.  This is not the first time that a significant national or world event has caused a shift in the drafting of force majeure clauses.  Terrorist incidents of the 1990’s and 2000’s changed the way force majeure clauses were drafted thereafter, and references to ‘fuel shortages’ hark back to political upheavals in the 1970s.

In 2020, it is the pandemic that has had us rushing to find the force majeure provisions in our agreements.  For sure, we will see these provisions being adapted going forward so that they better reflect the realities of a potential ‘second wave,’ or a future new pandemic.

The reality is that Coronavirus is here to stay for some time.  Whether it is in the form of continued Covid-19 infection, either in the UK or elsewhere, second spikes of infection, or even mutations or developments of other coronaviruses, we all need to consider how our franchise agreements can protect us going forward, and what changes we ought now to make.

But don’t be too hasty.  Already, Goldstein Legal have seen several examples of rushed re-drafting of force majeure provisions, which squeeze in the word ‘pandemic’ somewhat randomly, on the assumption that this fixes the issue going forward.  In some cases the drafter has only achieved this by compromising the rest of the provision. A well drafted clause should adequately define ‘force majeure,’ provide a number of examples including ‘pandemic,’ and must expressly state that the definition is not limited to the examples contained therein. Additionally, the clause should specify which party is capable of invoking the clause, whether it leads to suspension or termination, and the relevant duration during which it applies.

Aside from force majeure, Covid-19 has put a special focus on some other particular franchise agreement provisions, that similarly need to be adapted for the ‘New Normal.’ The rights of either the franchisor or franchisee to suspend their obligations, or to suspend the operation of the franchise, is a good example.  These provisions in current franchise agreements have already been the topic of considerable debate and dispute within franchise systems in light of Covid, including:

• Is the franchisee in breach by not operating the system even though they have no customers?
• Is the franchisor in breach by not providing its support obligations during lockdown?
• Is the franchisee still liable to pay minimum fees even though they have no revenues?
• Can a franchisee use the pandemic as an excuse to throw the towel in on their franchise?

All these questions need to be considered now in the light of the ‘New Normal,’ and franchise agreements are going to have to change. As business begins to resume, Roz encourages all franchisors to conduct a review of their franchise agreements to increase preparedness in the future, with a focus on provisions that apply in the event of significant disruption.

Franchise agreements cannot be changed mid-way through a franchise term.  But they can be implemented on renewals or for new franchisees. In many cases, well-managed franchise systems have already consulted with franchisees and implemented changes to the system and/or the franchise agreement, by agreement between all the parties, so that the system is better placed to cope in changing circumstances.

If you are concerned about making changes to your franchise agreement, or have found that your current agreement does not include a force majeure clause, Goldstein Legal are able to assist.

Commercial Leases

The commercial property landscape has changed dramatically during the pandemic.  Shops and restaurants face closure, with insufficient footfall to cover their operating costs.  Businesses are now increasingly used to head office teams working remotely, meaning that the demand for office premises has significantly subsided.  Despite some ‘tough talk’ by landlords in the business press, when it comes to negotiating new leases or lease renewals, commercial tenants have significantly more leverage now than they had last year.  Commercial landlords are bracing themselves for tough times.

From a tenant’s perspective, in addition to negotiation on rental prices, it is also key to consider what rights you should have to suspend or reduce your liability to pay rent, or even to exercise a break clause, in the event that a second wave or further pandemic hits.

It may be that a future pandemic should be treated as an ‘uninsured risk’ in the lease, as currently already applies in the case of certain events causing destruction of the premises.

The Agility of the Operations Manual

Whilst a franchisor cannot alter the provisions of an existing franchise agreement mid-way through its term, the franchisor is entitled to update the Operations Manual from time to time, as need requires. Now is the time for franchisors to formalise in their Manual any operational changes that they have implemented in the system to account for Covid-19.  Examples include: adjustments in relation to the use of franchisee premises; the incorporation of new health and safety measures in line with government guidelines; social distancing measures; and the use of virtual communications as an alternative to face to face meetings and conferences.

Remote Franchise Agreements and Notices

The advent of social distancing has presented logistical challenges when it comes to getting franchise agreements signed.  A recurrent question is whether legal documents are capable of being executed electronically rather than by hand. In short, the answer is yes, but with one very significant exception.  Franchise agreements can be signed electronically, but anything that needs to be signed ‘as a Deed’ cannot.  This is because Deeds must be signed in hand in front of a witness who then provides their own signature by hand.

Unfortunately, franchise agreements typically provide that the personal guarantee (‘PG’) element of a franchise agreement should be signed ‘as a Deed.’ There are complicated legal reasons why a PG is more likely to be enforceable this way. Therefore, franchisors have three options:

• Continue to ensure that franchise agreements are signed by hand and sent by post
• If your franchise agreement permits it, have the franchise agreement signed electronically, but ensure that the PG element, if it sits as a separate document, is signed and witnessed by hand
• Have the whole agreement, including the PG element, signed electronically, but run the risk that your PG may be less enforceable.

Please do not make this decision without taking proper legal advice, based on a review of your specific franchise agreement.

Now is also a good time to look at another, often ignored, provision of your franchise agreement – as regards the service of notices.  Only a minority of franchise agreements provide that legal notices can be served by email.  In fact, some agreements still provide instead for service by ‘facsimile transmission.’  Bearing in mind that many people of working age do not know that such technology ever existed, at the very least this should be taken out of your franchise agreement. Then talk to your lawyer about whether, in light of the events of 2020, it is time to take the step of providing for email service, as well as service by post or by hand.

Returning to Work

Roz advises that the best commercial approach is to assume that Covid-19 is not going to disappear, both from a health and safety and operational perspective.

Franchise networks should continue to facilitate remote working where possible. For those that are in a position to begin returning to the workplace, Goldstein Legal recently released a blog outlining the key considerations for employers at this time – https://www.goldsteinlegal.co.uk/qa-with-goldstein-legal-returning-to-work-after-covid-19/

While the health and safety of employees remains a primary concern, franchisors should continue to adapt to new ways of working, particularly in industries that provide face-to-face goods and services. Franchisors are especially encouraged to consider the provisions in their franchise agreements preventing certain modes of operation, and measure this alongside new methods that may allow franchisees to evolve or recommence trading at this time.