Area Developers – Beware of Cross-Default Provisions in Franchise Agreements
Anyone considering becoming an area developer (sometimes also called multi-unit developers) should beware of cross-default provisions in their unit franchise agreements. These cross-default provisions generally state that it will be grounds for termination of the franchise agreement if the franchisee breaches any of its other agreements with the franchisor. However, area developers often breach the terms of their area development agreement by failing to fully complete their build-out schedules, for example, by building only four of five required units. Under those circumstances, that breach of the area development agreement, standing alone, could give the franchisor the right to terminate the other established unit franchises, even if those franchises are in full compliance with the terms of their individual unit franchise agreements.
At the time of negotiating the area development agreement, potential franchisees should be extremely careful to ensure any cross-default provision is clarified, to ensure that a breach of the area development agreement, solely as a result of not completing the anticipated number of individual franchise units, does not give the franchisor the right to terminate all of the unit franchise agreements that are otherwise fully in compliance with the terms of their individual unit franchise agreements. –Stephen E. Story
