Periods and replaced them with new “ development milestones ” and updated the opportunities to cure associated with the same .
Developers are now required to : ( i ) sign a lease at least four months before the development deadline ( with four months to cure ); ( ii ) commence construction at least three months before the development deadline ( with four months to cure ); and ( iii ) open the club by the development deadline ( with six months to cure ). As a result , to avoid termination ( using the full cure periods available ), the new ADA requires developers to : ( i ) sign a lease by the development deadline ; ( ii ) commence construction within one month after the development deadline ; and ( iii ) open the club within six months after the development deadline . In addition , the ADA still has the language related to force majeure events ( i . e ., certain material events outside of the developer ’ s control ), which can also excuse delays in development .
Changes to Transfer Rights : In both the ADA and FA , PFHQ made some potentially material changes to the transfer language . For example , PFHQ updated the transfer conditions to give PFHQ an expanded ability to review the purchaser ’ s financial ability to perform . That language , however , extensively uses the word “ reasonably ,” such that PFHQ cannot be unreasonable in connection with that evaluation .
Another key transfer change relates to the ability to transfer an existing royalty rate . Previously , if you had a royalty rate of 5 % or higher , the purchaser could generally assume the seller ’ s royalty rate for the remaining term of the FA . In the 2023 FA , unfortunately , PFHQ removed the right to transfer the royalty rate . As such , on transfer , the royalty rate will “ reset ” to the then-current rate at the time of transfer .
Finally , PFHQ extended the length of its right of first refusal on applicable transfers from 30 days to 45 days .
In-Term Financial Review in ADA : In Section 10.2 of the ADA , PFHQ inserted a new provision allowing it to more extensively review the financial health of a developer during the term of the ADA ( i . e ., not just in connection with a transfer ). While this provision is somewhat concerning ( depending upon how aggressively PFHQ uses this provision ), the inclusion of the word “ reasonable ” in numerous places and a 90-day opportunity to cure should provide developers with some level of comfort here that they cannot be unfairly defaulted / terminated due to this new provision .
Royalty on Pre-Paid Memberships : Previously , the FA did not require the payment of a royalty on pre-paid memberships . Section 9.11 of the FA now says that PFHQ “ reserve [ s ] the right to charge an equivalent Royalty ” on “ all memberships not included in the EFT Dues Draft .” The intent seems to be to allow PFHQ to collect a royalty on pre-paid memberships – and other future forms of membership that are not included in the normal EFT dues draft . Fortunately , we were able to have PFHQ insert language expressly saying that this new language does not apply to “ enrollment fees or prorated fees for memberships with monthly and annual fees included in the EFT dues draft ,” such that payments will continue to be excluded from the royalty calculation .
Conclusion
As many of you have heard me say before , my goal in the annual FDD process is to try to make the documents “ less worse ” than they would have been without franchisee involvement . I firmly believe the PFIFC and I accomplished that goal this year .
Indeed , while the IFC was instrumental in modifying certain provisions PFHQ ultimately included in the 2023 ADA and FA , some of the biggest ( and best ) impact the IFC was able to make related to changes PFHQ ultimately decided not to make to the ADA or FA due to PFIFC pushback . Keeping out some of those changes resulted in a significant benefit to essentially all franchisees and developers , and overall , made the documents significantly “ less worse ” than they would have been without PFIFC involvement .
In sum , while many franchisors “ go it alone ” when updating the FA and ADA , PFHQ voluntarily spent months going back and forth with the PFIFC on its proposed changes to the FA and ADA . This process , and the heavy involvement of the IFC , provides a material benefit to all Planet Fitness franchisees and developers , and is something we hope to continue in future years .
Finally , I want to , again , encourage all of you to read the new FA and ADA in their entirety to ensure you understand what you are signing . But , as always , if you have any questions , please do not hesitate to reach out to your counsel or me to discuss . G
J . Mark Dady is an attorney and managing partner of Dady & Gardner , P . A . His practice is focused on the representation of franchisees , dealers and distributors located throughout the United States , and he has been working with the PFIFC and other PF ® franchisees and developers since late 2014 . For more information on Mark Dady and Dady & Gardner , P . A ., please visit www . dadygardner . com ; call him at 612-359-5488 ; or email mdady @ dadygardner . com .
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GearedUp | 2023 Issue 3
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