Franchise Agreements During COVID-19: What You Need to Know
The COVID-19 pandemic has caused unprecedented disruption in businesses across the world. Franchise systems are no exception. With the pandemic affecting the economy and altering consumer behavior, franchisees are struggling to keep their businesses afloat. In such a scenario, franchise agreements have become critical for both franchisors and franchisees. In this article, we’ll discuss some of the key aspects of franchise agreements during COVID-19.
The Force Majeure Clause
The force majeure clause is an important provision in a franchise agreement that outlines the circumstances under which the parties can be excused from performing their obligations. It’s usually included in the agreement to address events that are beyond the control of the parties, such as natural disasters, wars, and pandemics. The clause can provide relief to franchisees who are unable to perform their obligations due to COVID-19-related disruptions.
Depending on the specific language of the clause, it may allow franchisees to suspend or terminate their obligations under the agreement. However, it’s important to note that the force majeure clause is not a “get out of jail free” card. The franchisee must provide evidence that the disruption is directly caused by COVID-19 and that alternative methods of performance are not possible.
Franchise agreements also include provisions that detail the financial obligations of the parties. These obligations can include royalty payments, lease payments, and advertising fees. With the pandemic affecting the economy, franchisees are struggling to meet these obligations. In some cases, franchisors have agreed to waive or defer payments to help their franchisees.
However, it’s important to note that franchisors also have financial obligations to meet, such as maintaining the brand standards and providing support to their franchisees. Therefore, franchisees must communicate with their franchisors and work together to find solutions that meet the needs of both parties.
The Right to Terminate
Franchise agreements also include provisions that outline the circumstances under which the parties can terminate the agreement. These provisions may include failure to pay royalties, breach of the franchise agreement, or failure to meet performance standards. With the pandemic affecting the franchisees’ ability to meet these obligations, there is a risk of termination by the franchisor.
However, termination should not be the first course of action. Franchisors should work with their franchisees to find alternative solutions before considering termination. Terminating the agreement can be costly for both parties, and it may not necessarily solve the underlying issues.
In summary, franchise agreements during COVID-19 require a flexible and collaborative approach from both parties. Franchisees must communicate with their franchisors and provide evidence of the COVID-19-related disruptions. Franchisors, in turn, must be willing to work with their franchisees and find solutions that meet the needs of both parties. The force majeure clause, financial obligations, and the right to terminate must be carefully considered in light of the pandemic’s impact on the franchise system. By working together and finding innovative solutions, franchisors and franchisees can navigate these unprecedented times and emerge stronger.