What happens if you have entered into a Franchise Agreement, and then you (or a Nominated Representative):
- suffers a more serious illness which prevents you from operating the Franchised Business for an extended period; or
- suffers a permanently incapacitating injury; or
Typically, where the Franchisee is a company a director will have been appointed as Nominated Representative under the term of the Franchise Agreement – being the individual directly in charge of managing the day-to-day operations of the Franchised Business. Where the Franchisee is an individual, the Franchisee and Nominated Representative are usually one and the same person.
If the Franchisee is a company with a sole director or the Franchisee is an individual, any serious illness, incapacity or death of that person will have a dramatic effect on the Franchised Business.
There are mechanisms you can put into place in the background to mitigate risk and to help manage the situation. Which mechanism to adopt will vary depending on the structure utilised for the Franchisee entity (eg. whether it is a sole director or multi-director company as Franchisee, a sole individual Franchisee or Franchise operating under a Partnership). Types of strategies which can be used might include one or more of the following, depending on the circumstances:
- accident, trauma and life insurance;
- key man insurance;
- having an up to date and appropriately drafted Will;
- using an Enduring Power of Attorney (and/or Company Power of Attorney).
The Franchising Code of Conduct (“the Code”) does not specifically deal with the issue of illness, incapacity, or death of a Franchisee (or a Nominated Representative). As a result, it’s important to check the terms and conditions of the Franchise Agreement to see what the agreement says is the process where such an event occurs.
Some poorly drafted Franchise Agreements maybe entirely silent on the processes for dealing with illness, incapacity, or death of a Franchisee (or a Nominated Representative). However, Franchise Agreements that are better prepared may offer a range of processes if such an event occurred, such as:
- entitling the Franchisor to manage the Franchised Business until the Franchisee or Nominated Representative regains their health; or
- another Franchisee in the network (or nominated party) being able to manage the Franchised Business until the Franchisee or Nominated Representative regains their health; or
- allowing the Franchisee’s personal representative (such as an attorney) or even family members (with appropriate training) to manage the Franchised Business until the Franchisee or Nominated Representative regains their health; or
- allowing the Franchisee (or their personal representative) to sell the Franchised Business; or
- entitling the Franchisor to elect to buy back the Franchised Business through a first right of refusal arrangement; or
- the Franchisor simply offering to buy back the Franchised Business; or
- a negotiated surrender of the Franchise Agreement; or
- enabling the Franchisor to terminate the Franchise Agreement.
Depending on the circumstances, one or more of the above may apply and there may be other possible solutions that can be noted in the Franchise Agreement or negotiated.
Illness, incapacity and death is a very important issue that should not be overlooked when considering a franchise.
If you are an intending Franchisee, we recommend you obtain legal advice from solicitors experienced in franchising law, such as Greyson Legal, before you sign a Franchise Agreement. We can:
- review the documents;
- help you understand your rights and obligations;
- give you a comprehensive report on the terms and conditions of the franchise documentation;
- advise you where we recommend changes be made to the documents;
- alert you to issues you should clarify with the Franchisor; and help you negotiate with the Franchisor.
For assistance with Franchising, contact Greyson Legal.
T: (07) 3142 0463
The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.
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