Not every business model depends on direct ownership of every location. Many business will create franchises, locations which are managed by different ownership but still retain the name and style of an overarching company. Franchise law has changed over the years and many legal issues can arise during the formation and operation of a franchise.
In New Jersey, most franchises are governed by the Franchise Practices Act (FPA) of 1971. Applicable franchises are those which establish or maintain a place of business in New Jersey, have gross sales in excess of $35,000 a year between the franchisor and franchisee, and have at least 20% of gross sales from the franchise. Franchises are also subject to any laws which affect other businesses as well.
The FPA requires all franchise agreements to be in writing. Before a franchise can be sold, assigned, or transferred the franchisee needs to give the franchisor notice of the transferee’s name, address, financial qualification, and business experience during the last five years. Without this notice any franchise agreement is terminated. After the notice is given the franchisor has sixty days to send a written response to either approve or deny the transfer. Denials must be in good faith.
The FPA further stipulates a franchisor cannot terminate or fail to renew a franchise agreement within giving notice at least sixty days before with the reasons for the termination or lack of renewal. Again the franchisor must act in good faith and also meet a commercially reasonable standard. New Jersey sets three criteria for termination, of which only one is sufficient to terminate. The first is if a franchisee voluntarily abandoned a franchise; in these cases only fifteen days notice is necessary to terminate the agreement. The second criterion is if a franchisee is convicted of an indictable offence which is directly related to the franchise business; in these cases termination can occur immediately. Thirdly, a franchisor can terminate a franchise agreement if good cause exists. FPA defines good cause as the failure of the franchisee to substantially comply with the reasonable contractual requirements imposed upon him under the franchise document.
Retaining an attorney to draft a franchise agreement can save both sides from legal headaches down the road. A lawyer can also help during the negotiation, review, and termination process. If you are considering entering a franchise relationship as either a franchisee or franchisor you contact Stone Law at 732-444-6303 or leave us a message on our website.