COVID-19 and the franchise landscape

As the coronavirus pandemic causes widespread business disruption, franchisors and franchisees will need to pull together to adapt to the new circumstances. 

Some sectors may be badly affected in the short-term, such as retail, while areas such as hospitality and aviation are at risk of longer-term problems. Difficulties will be common at all stages of the business model, from supply chain to staffing to sales. 

We take a look at how those involved in franchising can face an uncertain future proactively and find their best chance for success in the new landscape. 

Business contracts, including the franchise agreement itself, often contain a force majeure clause outlining what will happen in the event of one party being unable to fulfil their obligations because it has become impossible to do so.

An alternative to a force majeure clause is a material adverse change clause, which may give the parties involved the opportunity to change or end a contract if there is a substantial alteration to circumstances.

There may also be the opportunity to claim that a contract that has become impossible to fulfil has been frustrated. In that instance, it will be discharged.

In deciding whether to end or renegotiate contracts, franchisors and franchisees may be able to work together to find a way to keep a business running. For example, a franchisor who holds a head lease to premises may be able to agree to a more advantageous rent with the head lessor and pass on the savings to the franchisee.

Practical considerations

Communication will be of vital importance in maintaining a good relationship between franchisor and franchisee. By discussing problems and working out solutions together there is the opportunity to strengthen the business relationship.

Franchisors may be able to allow some relief on payments or defer them until the franchisee is able to meet them.

The franchisor will also need to assess the health and safety provisions in the light of the new rules, for both staff and the public. New procedures will almost certainly be required and this is an area where the franchisor can give a strong lead, helping franchisees to comply with regulations.

There may also be government help available for businesses in need and franchisees should make themselves aware of any entitlements there may be.

Going forward, franchisors will need to be realistic in their business and growth plans. Franchisees and the overall business model may benefit from increased marketing and advertising.  There may be the opportunity to adapt to offer products or services that are more attractive and viable both during and in the immediate aftermath of the pandemic, such as more e-commerce and online or delivery options.

Where franchisees cannot continue, franchisors who help them leave the business with the minimum of difficulty will build a reputation as being helpful, understanding and good to work with.

By communicating honestly and working together to cope with problems, franchisors and franchisees will stand the best chance of coming through the pandemic and being able to restore productivity in the future. 

At Del Canto Chambers, we provide a wide range of services for both franchisors and franchisees. We can offer our help and expertise and explain your rights and obligations during the business disruption caused by COVID-19. If you would like to discuss your options, we would be happy to hear from you. 

We take a clear and practical approach to our clients’ needs, ensuring that we understand the business plan and offer the best-suited solutions to meet their commercial goals.

Del Canto Chambers’ team provides in-depth counselling in transactions and regulatory matters for the complete range of the franchisor’s business and legal needs, from establishing and growing systems to managing franchisor and franchisee relationships. Our team also consists of litigators who are experienced at successfully resolving franchise disputes, whether they involve core franchise law or franchise-related litigation.

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