Hot Tips For Franchisors - Execution Of The Franchise Agreement

Article by Fiona Wallwork and Katrina Hammon

Franchisors have to operate their businesses within a complex, ever growing regulatory environment. We realise that it is not always easy to keep up to date with the law, and sometimes the fundamentals get overlooked. In each edition of Franchising Focus we give our Top Tips to remind our franchisor clients of the fundamentals and to give you some practical guidance based on our experiences.

This month's Hot Tips for Franchisors relates to proper execution of the Franchise Agreement. Here are some formalities that are sometimes overlooked:

• Only legal entities have the capacity to enter into agreements or contracts, assume obligations, incur debts, be sued and be held responsible for their actions. Common legal entities include private companies, individuals/sole traders, partnerships and trusts. A business name or trading name is not a legal entity and cannot enter in a contract, including a franchise agreement.
• If the franchisee is a corporate entity, you should (at the very least) conduct searches of the ASIC company register to check registration status, the ACN and ABN, who are the appointed directors and shareholders, the registered address and business address, whether there are any charges registered over the assets of the entity, and that all required documents (for example annual returns) have been filed with ASIC. We often see franchise agreements that have been signed by a non-legal entity - this could have been avoided if simple checks had been made.
• If the franchisee is a trustee of a trust, you should check that the trust deed contains sufficient powers to enable the franchisee to conduct the franchised business and perform its obligations under the franchise agreement.
• Where a person signs a franchise agreement in their personal capacity (for example where the franchisee is a sole trader, or the person is signing as guarantor) his/her execution should be undertaken in the presence of an independent witness. The witness must be an adult person who is not a party to the franchise agreement. We sometimes see cases where directors of the franchisee company witness each others signatures when they sign in their personal capacity as guarantor - this may create issues with enforcement of the guarantee in the future. It is prudent to check that each witness is an independent person (for example the person's solicitor or accountant).
• A franchise agreement does not need not be dated to be valid and enforceable. However failure to date the franchise agreement can create problems when determining the commencement of the agreement, and in particular the commencement of the term. Dating also helps to identify the franchise agreement years later and puts the agreement into chronological context. You should not predate a franchise agreement - it should be dated the date that it is executed. If the franchise agreement is be effective retroactively then the franchise agreement should include a clause that provides that the commencement date for the agreement is the nominated earlier date.
• Any last minute amendments to the franchise agreement that are made by hand should be initialled by both parties to the contract. This will avoid issues in the future as to whether the amendment was unilaterally made, or whether it was an agreed amendment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.