California Enacts New Franchise Law
California Governor Jerry Brown recently signed into law a bill that extends new protections to franchisees as an enactment of a new franchise law.
The California Franchise Relations Act sets forth “certain requirements related to the termination, nonrenewal, and transfer of franchises between a franchisor, subfranchisor, and franchisee…” The law is highlighted by a provision that protects franchise owners from franchisors who seek to terminate their business without notice or who want to take possession of a successful franchise without first compensating the franchise owner.
Assembly Bill 525 amends California’s Business and Professions Code to require franchisors to give explanations in writing for terminating franchise agreements and to repurchase a franchisees’ assets upon termination. The law also allows franchisees additional time to correct infractions of franchise agreements and refines the legal reasons for franchisors to terminate them.
Termination of a Franchise
The new law extends the amount of time franchisees have to correct infractions of franchise agreements from 30 days to 60. It also changes the language to specify that these infractions must be a failure to “substantially comply with the lawful requirements imposed upon the franchisee by the franchise agreement,” not just any infraction, substantial or otherwise.
Franchisors can still end franchise agreements if the franchisee goes bankrupt; abandons the business for five consecutive days during which the franchisee is required to operate the business under the terms of the franchise; makes any material misrepresentations relating to the acquisition of the franchise business, or the franchisee engages in conduct which reflects materially and unfavorably upon the operation and reputation of the franchise business or system; the franchisee is convicted of a felony or any other criminal misconduct which is relevant to the operation of the franchise; the franchisee fails to pay any franchise fees or other amounts due to the franchisor within five days after receiving written notice that such fees are overdue; or the franchisor makes a reasonable determination that continued operation of the franchise by the franchisee will result in an “imminent danger to public health or safety.”
The law says that in that instance, “immediate notice of termination without an opportunity to cure, shall be deemed reasonable.”
Repurchase of Assets
Assembly Bill 525 adds Section 20022 to the Business and Professions Code requiring franchisors, upon termination or nonrenewal of a franchise, to buy from the franchisee, “at the value of price paid, minus depreciation, all inventory, supplies, equipment, fixtures, and
furnishing purchased or paid for under the terms of the franchise agreement,” not including personalized items, inventory, supplies, equipment, fixtures, or furnishings “not reasonably required to conduct the operation of the franchise business in accordance with the franchise agreement.”
The new section doesn’t apply if a franchisee declines a bona fide offer to renew the franchise or if the franchisor doesn’t prevent the franchisee from “retaining control of the principal place of the franchise business.” Franchisees withdrawing from the market where the franchise was terminated also aren’t required to buy the assets. The same is true when the termination is mutually agreed by the franchisor and the franchisee in writing.
Resale of a Franchise
The new law also stipulates that a franchisor can’t prevent a franchisee from selling or transferring a franchise to another person provided that person is qualified “under the franchisor’s then-existing standards for the approval of new or renewing franchisees.”
Written consent of the franchisor is required, but that approval can only be withheld if the potential franchisee doesn’t meet the franchise requirements. The franchisee must notify the franchisor of its intent to sell, transfer, or assign the franchise, and the franchisor has the right of first refusal to purchase the assets.
Thinking of Buying a Franchise?
If you are thinking of buying a franchise our webpage will provide you with sufficient information to educate yourself further on the matter and make a good and calculated decision. Visit our franchise section for more information or call Andrew Rogerson directly at (916) 570-2674.