Transfer Arrangements in Master Franchise Agreements

Master franchise agreements are generally long-term: 20 or 25 years is no exception. Various subjects are regulated in a Master Franchise Agreement, such as the possibilities and restrictions under which the rights granted may be exploited as franchise rights, a target with regard to the branches to be opened and often (unilateral) conditions under which the Master Franchise Agreement may be terminated prematurely by the master franchisor. When the latter occurs, it is striking that most master franchise agreements usually do not include proper transfer arrangements with regard to the acquired rights.

As a result, master franchisor, master franchisee and the franchisees may be faced with abrupt and highly undesirable consequences. After all, if the master franchise agreement suddenly ends prematurely, the master franchisee’s authority to exploit the franchise rights (or have them exploited) will lapse. In other words, the franchise agreements concluded with the various franchisees are operated without right or title. It would seem obvious that a master franchise agreement would then contain an arrangement that the franchise rights are at least transferred to the master franchisor. However, most master franchise agreements do not contain such an arrangement at all. It is also important that, despite the premature termination of the master franchise agreement, the accrued franchise rights now represent a certain, often considerable value. If, in the event of premature termination, transfer would take place to, for example, the master franchiser, it is plausible to also include in the master franchise agreement that the corresponding value would accrue to the master franchisee. This is without prejudice, depending on the nature of the early termination of the master franchise agreement, to the possibility for the parties to claim damages from both sides and possibly offset this with the intended value. Such an arrangement is also generally absent in regular termination master franchise agreements. If the parties have not arranged anything in this regard, the master franchise rights can therefore be transferred to a subsequent master franchisee, without the remaining master franchisee being assured of cashing in the value of the built-up organization.

Parties are therefore advised to expressly arrange the aforementioned aspects in advance in their agreement when concluding a master franchise agreement. This provides clarity for the master franchisor, master franchisee and the franchisees and may prevent many (interim) problems.

Ludwig & Van Dam franchise attorneys, franchise legal advice