Hamilton Pratt

Franchise Documentation

Introduction

Before a prospective franchisee is in a position to sign a franchise agreement it may be necessary to give him a substantial amount of confidential information.

Accordingly, a franchisee is usually required to enter into a confidentiality agreement prior to receiving the franchisor’s confidential information.
If a franchise operates from “High Street” premises, it may be difficult to ensure that premises are taken on simultaneously with the execution of the franchise agreement.   In these circumstances franchisors may require franchisees to enter into a franchise purchase agreement which obliges a franchisee to enter into a franchise within a specified period of time once suitable premises are found.  When premises are located the franchisor often takes a head lease and grants the franchisee a sub-lease.  If this happens the franchisor will, on termination of the franchise agreement, be able to terminate the lease and put in a new franchisee, provided that prior to the grant of the lease a court application is made to exclude the security of tenure provisions in the Landlord and Tenant Act 1954 and the lease has been drafted so that it terminates at the same time as the franchise agreement.

Intellectual Property

An essential feature of franchising is the reputation which a franchisor has established in his corporate identity whether this is a trade name, trade mark, service mark, copyright or company name.  It is important to ensure, therefore, that a franchisor is as fully protected as possible in this area. The following considerations should be borne in mind:-

  • Company  Name  - If a franchisor trades as a company  that  company’s  name cannot  be  used  as  the company name of any other company though  a third party may incorporate a company with a very similar  name. Thus  if a franchisor incorporates a company with the name “Macburger Limited” the  Companies  Registration  Office  will  not prevent  a  third  party  from incorporating  a company with the name, say, “Macburger (Midlands) Limited” or “Macburger  Franchising Limited”.  This will not, however, prevent an existing unincorporated business which has been using the name “Macburger” as its trade name from bringing a passing off action, or a trademark infringement action in the case of a registered trade mark, against a company using the Macburger name in its corporate name.
  • Passing Off - The owner of an unregistered mark or name can prevent a third party from taking advantage of his goodwill in relation to such mark or name. The original owner must show that he has built up a reputation in the mark or name.
  • Registered Trademarks - Trade marks can be obtained in respect of the supply of services as well as the supply of goods.  Once registered the owner of the trademark/service mark is able to prevent third parties from making use of  his mark either by claiming damages and/or an injunction (which is a court order preventing the third party from the unlawful use of the owner’s mark).   In order  to  obtain  a  registered  trade mark the word  chosen  should  not  be descriptive of the product or services to be supplied under the mark.
  • Copyright  - Any logos or designs used by a franchisor on his stationery, brochures,  shop fascia,  or packaging may be subject to copyright.   No registration is required because copyright is usually retained by the author of the copyrighted work.  Accordingly it is important when instructing design consultants etc to ensure that the ownership of the copyright is dealt with in the agreement with them.
  • Design Rights – Recent changes to UK and EC design rights could make them much more attractive to franchisors who will be able to obtain protection for their logos, packaging, shop displays, products and trade marks by obtaining a registered design right.

The Franchise Agreement

Generally speaking, a franchisor should not vary the terms of its franchise agreements.   Inevitably, strong feelings will be aroused amongst franchisees if they discover that some franchisees have better or different terms to themselves.   Furthermore, the administrative   difficulties in regulating franchisees with different franchise terms should not be underestimated.  This principle  does,  however, give rise to difficulties in a start up  phase  and with  this in mind franchisors have granted “development franchises” which may contain  preferential  terms  concerning the payment of the franchise  fee  in return  for which the franchisee agrees not to require strict compliance  with all the  franchisor’s obligations and agrees to provide the franchisor with reasonable assistance in establishing its franchise network.  However, beyond the development franchise stage, no variations to the terms of the franchise agreement should be accepted.

It is also important to remember that prospective franchisees should not be put off by the franchise agreement either because it is too one-sided in favour of the franchisor or because it is difficult to follow and written in "legalese".   A franchise agreement should therefore be well set out and contain no typing mistakes.   A prospective franchisee will have every reason to believe that a poorly presented franchise agreement reflects poor preparation of the franchise itself.