Le­gal con­sid­er­a­tions

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“The first step be­fore en­ter­ing any new ju­ris­dic­tion is to un­der­take broad le­gal due dili­gence of the laws and reg­u­la­tions ap­ply­ing to the fran­chise re­la­tion­ship you are about to en­ter,” ac­cord­ing to Scott An­tel, part­ner at the in­ter­na­tional law firm, Ber­win Leighton Pais­ner LLP. Here are 10 key is­sues re­gional fran­chisors must take ac­count of when con­sid­er­ing fran­chis­ing their busi­nesses to the US or to Europe 1. Le­gal sta­tus of the fran­chise re­la­tion­ship

Many coun­tries (the US, most EU coun­ties and China) have spe­cific fran­chise laws, whereas other coun­tries var­i­ously treat the fran­chise re­la­tion­ship un­der their civil codes as a com­mer­cial agency, a li­cense of rights or a per­sonal ser­vices con­tract. Know­ing the con­trac­tual sta­tus will sig­nif­i­cantly im­pact how you draft your fran­chise agree­ment to pro­tect your rights and limit your ex­po­sure.

2. Dis­clo­sure and reg­is­tra­tion re­quire­ments

Many coun­tries have dis­clo­sure obli­ga­tions, which the fran­chisor must pro­vide to the ho­tel owner seek­ing to fran­chise the brand and sys­tem. Penal­ties for fail­ure to com­ply can be se­vere. Other coun­tries re­quire that the fran­chise con­tract is reg­is­tered to make it valid. This can be in ad­di­tion to the obli­ga­tion to reg­is­ter the brand marks and name with the lo­cal trade­mark au­thor­ity. Th­ese reg­is­tra­tions can be time con­sum­ing, so ad­dress­ing this early will pre­vent de­lays in im­ple­ment­ing your fran­chise.

3. Sec­ondary li­a­bil­ity of fran­chisor

In some ju­ris­dic­tions, a fran­chisor can be held sec­on­dar­ily li­able for the wrong­ful third-party ac­tions of the fran­chisee un­der the agency doc­trine of ‘re­spon­deat su­pe­rior’. Fran­chisors need to struc­ture their fran­chise agree­ment (FA) re­la­tion­ships to min­i­mize their busi­ness ex­po­sure in such cases as well as en­sur­ing that the fran­chisee is ad­e­quately in­sured for such events and pro­vides in­dem­nity guar­anties to the fran­chisor in the event of a sec­ondary li­a­bil­ity claim.

4. Ter­mi­na­tion rights/rights of re­newal

In many ju­ris­dic­tions, a fran­chisee will have au­to­matic rights of re­newal of the FA un­less the fran­chisor can es­tab­lish ‘jus­ti­fi­able grounds’ for early ter­mi­na­tion or non­re­newal. This can of­ten be dif­fi­cult to prove. Fran­chisors need to have clear stan­dards and mea­sures to es­tab­lish whether a fran­chisee is in vi­o­la­tion of the FA and they need to doc­u­ment and no­tify the fran­chisee of vi­o­la­tions in or­der to sup­port any later claim for ter­mi­na­tion.

5. Ter­ri­to­rial and ex­clu­siv­ity lim­its

Fran­chisees will fre­quently seek to have cer­tain ter­ri­to­rial ex­clu­siv­ity for use of the fran­chised brand and sys­tem. Th­ese can of­ten con­flict with lo­cal com­pe­ti­tion laws and need to be checked and mod­i­fied so as to be en­force­able.

6. Taxes

Most MENA coun­tries have rel­a­tively lim­ited dou­ble-tax treaty re­la­tion­ships with other coun­tries, given the his­tor­i­cal ab­sence – or lim­ited ap­pli­ca­tion of – prof­its tax­a­tion in the re­gion. How­ever, fran­chise fees payable from most coun­tries to a Mena-based fran­chisor will be sub­ject to a with­hold­ing tax which can range from 10 to 30 per­cent. Make sure you ei­ther struc­ture the re­la­tion­ship in a way that can avail of an ap­pli­ca­ble tax treaty or pro­vide lan­guage in the FA (e.g., ‘gross up’ pro­vi­sions) as to who bears any with­hold­ing tax on the fran­chise fees.

7. Ap­proval of op­er­a­tor

A ho­tel fran­chise will only be suc­cess­ful if the ho­tel is op­er­ated by some­one with ex­pe­ri­ence of run­ning a prop­erty to the level of an in­ter­na­tional ho­tel and to the brand’s stan­dards. Make sure the FA al­lows for the fran­chisor to have ap­proval over the ho­tel op­er­a­tor, if third party, for ex­am­ple, at least over the ap­pointed gen­eral man­ager and other ex­ec­u­tive per­son­nel.

8. Choice of law and ar­bi­tra­tion

Given the var­ied le­gal sta­tus of fran­chise re­la­tion­ships noted above and the fact that the fran­chisor will be the ‘for­eign in­vader party’ in the re­la­tion­ship, se­lect a gov­ern­ing law that you are com­fort­able with and which pro­tect your rights to the brand and sys­tem. Although lo­cal manda­tory le­gal pro­vi­sions may over­ride cer­tain FA pro­vi­sions un­der a for­eign law con­tract, at least you will have greater con­trol over the re­la­tion­ship. The use of a neu­tral for­eign ar­bi­tra­tion venue can pro­tect against any lo­cal court bias where lo­cal law is used.

9. Key money struc­ture

It is in­creas­ingly com­mon for the fran­chisor to pay the fran­chisee a cer­tain amount of ‘key money’ as an in­duce­ment to en­ter into the FA. Of­ten, this is ap­plied to con­vert the ho­tel to the brand stan­dards. Make sure that any key money ad­vanced has spe­cific re­stric­tions on what it is used for. Re­view how such pay­ments are struc­tured as they can have po­ten­tially neg­a­tive prof­its, tax and VAT con­se­quences for the fran­chisee.

10. Owner guar­anty

In a for­eign mar­ket, the fran­chisor is likely to have less knowl­edge about the busi­ness rep­u­ta­tion and sound­ness of the coun­ter­party. Apart from un­der­tak­ing the ob­vi­ous coun­ter­party com­mer­cial and rep­u­ta­tional due dili­gence, make sure that any per­sonal or par­ent com­pany guar­an­tees of­fered are struc­tured in a way that means they can be en­force­able and col­lected. This is par­tic­u­larly im­por­tant when deal­ing with new or in­di­vid­ual fran­chisee coun­ter­par­ties as op­posed to larger in­sti­tu­tional par­ties.

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