Franchisee’s Fight with Franchisor Costs It a Sale of its Franchise

Introduction

This is a story of a broken deal: a sale of a restaurant franchise that did not happen because of a dispute with the franchisor.

The deal

The case here involved a franchise for seven Tim Hortons restaurants located in Michigan. The 2016 franchise agreements called for payment of franchisor royalties, advertising and other fees. The royalty fee was calculated as a percentage of weekly gross sales and was compensation for the franchisee’s use of the franchisor’s system and trademarks. The advertising fee was calculated as a percentage of monthly gross sales and provided for advertising, sales promotion, and public relations expenditures made by the franchisor on behalf of all Tim Hortons restaurants.

As part of the franchise deal, the franchisee also leased the restaurants from the franchisor. Rent under the written leases was a percentage of monthly gross sales, as well payment of taxes, utilities, and common area assessments and charges. However, the franchisee claimed that that it reached a verbal agreement with two employees of the franchisor prior to execution of the leases, where the franchisee was only required to pay rent based on a flat percentage of gross sales; meaning no reimbursement for taxes, utilities or common area maintenance charges.

From early in the relationship, the franchisee and franchisor fought over the calculation of the amount of franchise/lease payments. Ultimately, the franchisee had had enough and decided to sell. The franchisor introduced the franchisee to a potential buyer, and they entered into an asset purchase agreement. However, the franchisor refused to approve the deal unless the franchisee paid all past due amounts, including disputed amounts.

The lawsuit

The franchisor sued the franchisee in a Florida federal district court on October 9, 2018. The next day the franchisor issued a notice of default to the franchisee which stated that the franchisee had breached the franchise agreements by failing to pay the past due amounts. On November 13, 2018, the franchisor issued a notice of termination of the franchise agreements.

The franchisee nonetheless continued to operate the restaurants and the parties continued their efforts to negotiate a resolution of their dispute. The franchisor continued to supply the franchisee with approved supplies and the franchisee continued to make certain payments for rent, royalties, and ad-fund contributions. The parties were unable to resolve their dispute, however, and in January 2019 the franchisee ceased making any payments to the franchisor.

Shortly thereafter, the franchisor cut off the franchisee’ supply of approved products. On April 25, 2019, the potential buyer terminated the asset purchase agreement that it had entered into with the franchisee. Still, the franchisee continued to operate, at first with stored supplies, and later using supplies from vendors not approved by the franchisor.

The franchisor then asked the court to stop the franchisee from using any of the franchisor’s trademarks or service marks, and from representing the restaurants as genuine and authorized Tim Hortons restaurants, pending the outcome of the litigation.

The court ordered that the franchisee to immediately stop operating its restaurants as Tim Hortons restaurants during the litigation. The court said that the franchisee had likely lost the Tim Hortons franchise when it refused to pay to the franchisor the $225K in restaurant taxes, utilities and common area maintenance charges as required in the written leases.  This obligation was clearly stated in the written leases and no prior oral understanding between the franchisee and franchisor can override that written provision.

This case is referred to Tim Hortons USA, Inc. v. Tims Milner LLCC.A. No. 17-667 (MN)., United States District Court, D. Delaware, (June 17, 2019)

Comment

In 20/20 hindsight the franchisee should have worked out its issues with the franchisor before agreeing to sell the restaurant franchises. Had it done so it would have probably got the franchisor’s approval of the deal and pocketed a nice profit.

By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

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Posted in approval of franchisor, asset purchase agreement, franchise sale, integration clause, no oral modifications of contract Tagged with: ,

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