2. The Scope and Timing of Required Remodeling and Re-Equipping
In response to your written notice, PFHQ will typically acknowledge that it received your notice and will begin the renewal process. While uncommon, PFHQ could say that you are not entitled to renew because you are in breach of some obligation or you need to take other steps to be renewed. If that is the case, we recommend that you promptly reach out to a legal advisor to discuss appropriate next steps, as this is something you should take seriously and deal with promptly. More commonly, PFHQ will inspect your club, review the equipment currently in your club and look for any other operational issues that need to be addressed for you to be renewed. PFHQ will then provide you with a list of any remodeling or re-equipping it is requiring you to complete in order to be renewed.
Once you receive PFHQ’ s initial list, you should evaluate whether PFHQ’ s response is reasonable, both in terms of what they are asking you to do( for example, did you just spend a significant amount of money on something PFHQ is now asking you to replace?) and when they are asking you to do those things( for example, is PFHQ asking you to complete a remodel during your busiest time of year). Many of the newer Franchise Agreements( or older Franchise Agreements that contain signed amendments from 2015) include language expressly requiring PFHQ to be“ reasonable” when imposing remodel and re-equip obligations on renewing franchisees. As a result, if you believe PFHQ is being unreasonable in terms of either the“ what” or the“ when,” you should discuss your concerns with the appropriate people at PFHQ to see if you can come to an agreement on the scope and timing of the remodel / re-equip that works for both you and PFHQ.
3. Signing the Renewal Franchise Agreement
Once you have sent your written notice and worked through any issues related to remodeling and re-equipping, the next step is to review and sign the renewal Franchise Agreement. Again, it is important for you to review the terms of your existing Franchise Agreement, but most likely, you will be required to sign PFHQ’ s“ then-current” form of Franchise Agreement, which could likely contain a higher royalty rate than you are currently paying( as the current Franchise Agreement calls for a royalty of 7 percent, but limits PFHQ’ s ability to receive rebates).
When you receive that renewal Franchise Agreement, you should, as is always the case, talk to a legal advisor to make sure the renewal Franchise Agreement is consistent with the form you are entitled to receive. In addition, if there are special terms in your existing Franchise Agreement( for example, carve-outs related to existing business interests, etc.), you should consider whether you want to request those same changes in the new form of Franchise Agreement.
It is also important for you to know that the new form of Franchise Agreement you sign will likely limit PFHQ’ s ability to receive rebates on some of the products and services you will likely be required to purchase or use in connection with remodeling( and, to a lesser extent, certain equipment purchases). In connection with the renewal process, you should talk to PFHQ to ensure, if you can, the prices you are paying during the remodeling process are consistent with the terms of your renewal Franchise Agreement( i. e., do not include impermissible rebates).
Finally, if you are up for renewal in the next year or two, there is a chance( depending upon:( 1) what form of Franchise Agreement you currently have;( 2) the royalty rate you currently pay; and( 3) whether you have signed certain Side Letters previously offered by PFHQ) you may be able to continue paying your current royalty rate for a period of time. More specifically, some of the newer( generally 2015 to the present) forms of Franchise Agreement( Section 14.1( 5)) and the Supplemental Side Letter
PFHQ will inspect your club, review the equipment currently in your club and look for any other operational issues that need to be addressed for you to be renewed. PFHQ will then provide you with a list of any remodeling or re-equipping it is requiring you to complete in order to be renewed.
offered in 2015( Section C( 1)) include language saying that, if you have a royalty rate of 5A or higher, PFHQ“ will give you up to a twenty-four( 24) month grace period” prior to you being required to pay the higher royalty, with that“ grace period” starting on the date PFHQ gave notice it was increasing its royalty rate.
For example, if you have a Franchise Agreement that calls for a royalty rate of 5A( or 6.59A) and you signed the Supplemental Side Letter back in 2015, you may have the right to continue paying the 5A( or 6.59A) royalty rate for two years from the date PFHQ initially announced it was moving to a 7A royalty rate. Whether this applies to you will depend upon a number of factors, so again, you should carefully review your existing Franchise Agreement and obtain the appropriate legal advice prior to signing a renewal Franchise Agreement.
Conclusion
While there are certainly hoops that you need to jump through to be renewed, renewing your existing Franchise Agreement does not need to be a complicated or painful process. In order to make sure that is the case, you should be sure to:( 1) provide PFHQ with proper notice that you want to begin the renewal process;( 2) work, early in the process, with PFHQ to reach a fair and reasonable agreement on the scope and timing of any remodeling or re-equipping; and( 3) review the terms of the renewal Franchise Agreement to make sure it is the appropriate form and contains the terms to which you are entitled. 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 Dady at 612-359-5488 or send an email to mdady @ dadygardner. com.
GearedUp | 2017 Issue 4
25