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Ash, Solicitor
Category: Law
Satisfied Customers: 10916
Experience:  Solicitor with 5+ years experience
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If a franchise contract includes a financial penalty by the franchisee bef

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If a franchise contract includes a financial penalty for termination by the franchisee before the end of the (5 year) term, should this be explicitly detailed in the contract? I am wrestling with a clause that stipulates a minimum monthly fee must be paid. In the case of early termination (due to liquidation) the franchisor interprets this to mean that minimum fee is is multiplied by the number of months remaining for the Term, by way of a financial penalty. This is not at all clear in the fees clause and is not mentioned in termination or consequences of termination. The franchisor has personal guarantees - ensuring payment can be recovered from directors in the event of liquidation. So this must be resolved.
Hello my name is ***** ***** I will help you.What does the clause actually say please?
Customer: replied 2 years ago.
Hi Alex. The clauses are:4. Fees, Payments and Commissions4.1.1 In consideration of the grant of right and licence to operate the Business the Franchisee shall pay without any deduction or set-off the fees in 4.2.2 below.4.1.2 A Management Service Fee equating to 4% of Gross Revenues in each Year.4.1.3 The payment of the Management Service Fee under Clause 4.1.2 is subject to a Minimum Fee in each year of £250 per month plus VAT until the Franchisee has paid Management Service fees in that Year of no less than £3,000 plus VAT.'The interpretations defines the Business as carrying on selling the Services and Products.
What does it say about termination?
Customer: replied 2 years ago.
There is a Termination and Consequences of Termination section. Both are very lengthy and detailed, but there is no section relating to a penalty or continuance of fees. It says we must pay them monies owed and these shall be liable even in the event of liquidation.
What does it say about what is owed on termination?
Customer: replied 2 years ago.
Franchisor may terminate the agreement... all rights of franchisee cease if... (long list, of which one says):If the franchisee fails to pay any sum by the due date under this agreement.
Customer: replied 2 years ago.
Under Consequences of Termination.... long list including:Pay all the franchisors costs including without limitation all legal costs incurred in relation to terminationPay all creditors of the business
Customer: replied 2 years ago.
We expected any clauses about penalties or long term fees to be explicitly detailed either in the fees section or consequences of termination.
Does it say you have to pay the fee for the remaining term?
Customer: replied 2 years ago.
Nowhere does it say that, that we can find.
Customer: replied 2 years ago.
The only way you could arrive at that conclusion would be to refer to the fee clause (4.1.3 as shown above) and look at the definition of Year in the interpretations. This says: 'A 12 month period commencing on the date of this agreement or any anniversary thereof.'Could they rely on just that?
This is open to interpretation. Ordinarily you would be liable for the fee until the end of the agreement. For example if you have a mobile phone you are tied into a 2 year contract and if you cancel early then you are liable for the fee until the end of the term.You have contracted for 5 years so you should be liable for a fee for 5 years.However if the agreement doesnt say you are liable for the fee until the end of the term there is a possible get out. Its poorly drafted.But if it went to Court then you would be relying on a Judge to interpret it that way.But your argument is that it does not say you would be liable for the fee until the end of the term.Can I clarify anything for you about this today please?Alex
Customer: replied 2 years ago.
Yes, that makes sense. And I guess to add / clarify, we did a lot of diligence on this contract (including legal advice) and nobody considered that termination would result in a continuance of the minimum fee for the term. Furthermore, in an email the Franchisor refer to the fee as a 'financial penalty'. Surely, if this is how they perceive it, any Judge would expect it to be properly labelled. And there may be a distinction between a penalty and liquidated damages??
Yes as a penalty is not legal. Whereas damages are.
Does that clarify? Alex
Customer: replied 2 years ago.
Yes, thanks Alex. You can go back to enjoying your evening. Much appreciate your advice.
Happy to help. Please if I could invite you to rate my answer before you go today, so the site credits me for the time spent with you. Thanks
Customer: replied 2 years ago.
Yes, of course.
Thanks. Have a great weekend too. Alex
Customer: replied 2 years ago.
How do I rate you - do you send a link?
You should be able to click on the stars here.
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