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lead to the termination of any of your underlying Franchise Agreements. So, while you may lose the right to continue developing, it is unlikely you would lose your right to continue operating the clubs you have already opened and are operating( although, again, you should check the specific provisions in your ADA to make sure).
2015 or Newer ADA or Pre-2015 ADA with a MOU Side Letter
For those of you who fall into the second category( i. e., either a 2015 or newer form of ADA or a pre-2015 form of ADA with an executed MOU Side Letter), you are typically in a much better position. Due to the PFIFA’ s efforts and certain concessions from PFHQ that came into being in the 2015 form of ADA, you should likely be in a position to use a“ Grace Period” in the event you receive a default notice from PFHQ. Each“ Grace Period” has two components to it – a six-month“ Free Grace Period” and, if necessary, a six-month“ Paid Grace Period.” Developers typically start out with three“ Grace Periods,” assuming there had been no prior development schedule defaults, but check your MOU Side Letter or ADA as that will specify how many you have.
As a result of the“ Grace Periods” in your ADA, in the event you fall behind on your development schedule, PFHQ will send you a written notice requiring you to provide them with a summary of the reasons why you did not meet your development schedule and what you plan to do to cure. Your written summary to PFHQ does not need to be incredibly long, but if there are specific reasons why you did not meet your schedule( e. g., lack of real estate, lost deals, lack of assistance, etc.) and specific things you are doing to
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cure( e. g., new sites under consideration, LOIs outstanding, etc.), it certainly does not hurt to explain those details to PFHQ.
Upon providing that notice to PFHQ, you will be required to use a“ Grace Period” and enter the six-month“ Free Grace Period” component. There is no charge for this“ Free Grace Period.” If you cure within that six-month period of time by opening the required number of clubs, then you are back on track and simply continue on with your development( although no future development schedule deadlines have been extended, e. g., if you use a“ Grace Period” to excuse a delay on a Dec. 31, 2016, development obligation and you cure, your development obligations for Dec. 31, 2017, will still be due on Dec. 31, 2017). If you do not cure within that six-month period of time, then you enter the“ Paid Grace Period.” For clarity’ s sake, a“ Paid Grace Period” does not count as you using a second“ Grace Period.” It is still part of the first“ Grace Period.”
The“ Paid Grace Period” lasts an additional six months, during which time PFHQ agrees not to terminate your ADA due to your development schedule default( meaning you have the ability to receive up to 12 months to cure the initial development schedule default). But, unlike the standard“ Free Grace Period,” you must( as the name implies) pay PFHQ. More specifically, for each month during the“ Paid Grace Period” that you do not cure the default, you are required to pay PFHQ $ 2,500 for each club you were required to have open and operating but did not( e. g., if you are one club short, you have to pay $ 2,500 per month, and if you are two clubs short, you have to pay $ 5,000 per month). Once you open the required number of clubs, the payments will no longer be taken out of your account and you will have cured the development schedule default( although, again, no future development schedule deadlines have been extended, so be sure you keep that in mind).
In sum, if you are entitled to receive a“ Grace Period,” you will receive six months to cure from the date PFHQ sends you written notice of your failure to comply with the development schedule, and if you still have not cured after that first six months is up, you can receive an additional six months to cure, but will be required to make monthly payments to PFHQ( but, again, you would only use up one of your“ Grace Periods,” not
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two). Overall, this is a substantial improvement over what existed pre-2015 and makes it substantially more difficult for PFHQ to terminate a developer’ s ADA.
Importantly, however, developers should keep in mind that the“ Grace Period” concept is not perfect. For example, a developer is generally only entitled to receive a“ Grace Period” if the failure to comply with the development schedule relates to two or fewer clubs, i. e., if you are three clubs short, you generally will not be entitled to a“ Grace Period.” Further, a developer only has the right to receive up to three“ Grace Periods,” so if you are continually late on your development schedule, you could run out of“ Grace Periods” to use. And, finally, if you fail to cure at the end of the“ Paid Grace Period,” termination of your ADA is a very real possibility.
Concluding Comments
If you find yourself in a situation where you are behind on your development schedule and you do not believe you will be able to cure( e. g., you are not entitled to receive a“ Grace Period,” you have used up all of your“ Grace Periods,” or you are approaching the end of your“ Paid Grace Period” and still do not have the required number of clubs open), I strongly advise you to reach out to someone and to do so sooner, rather than later. Whether that be an attorney to discuss your legal rights or PFHQ to discuss a potential amendment to your ongoing development schedule or signing of a new ADA, having some time to work through the issues well in advance of a potential termination gives you options, which is always a good thing. G
J. Mark Dady is a partner at Dady & Gardner, P. A. His practice is focused on the representation of franchisees, dealers and distributors located throughout the United States. For more information on Mark and Dady & Gardner, P. A., visit www. dadygardner. com; call him at 612-359-5488; or send an email to mdady @ dadygardner. com.
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GearedUp | 2017 Issue 1 |
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