Question: Our borrower is in default and we are concerned that the franchise agreement may also be in default. If we foreclose and/or have a receiver appointed, what happens with the franchise agreement?
Answer: A bankruptcy, foreclosure or appointment of a receiver are all standard cases of default in a franchise agreement. During a bankruptcy however, the court may require a franchisor to continue doing business with the debtor, while state receivership laws have no such provisions.
Most commercial loans include an agreement between the lender and the franchisor that if the borrower/franchisee defaults, the lender may cure the default in order to keep the franchise in place. Absent such an agreement, commonly called a "comfort agreement" or "comfort letter," neither the lender nor a receiver has any legal right to force the franchisor to continue allowing the use of its brand.
Question: So how do we keep the brand in place during a receivership or during the REO period prior to sale?
Answer: The brand is kept in place with the franchisor’s approval. Typically the franchise or will want to keep the location in their chain, and also continue to collect royalty and marketing fees. In addition, it is likely that any new buyer will keep the same brand. While the receivership estate has no authority to pay pre-receivership debts of the borrower, the franchisor can be assured that fees will be kept current during the receivership.
In some cases where the operation has been sub-par, the franchisor may even waive some of the fees to keep the property open and operating. This is simply a judgment call for the brand, and will be impacted by the value of the market and site, the condition of the property, and interest f rom other franchisees as buyers, etc.
Question: If we want to keep the brand, will the receiver have to sign a new franchise agreement, and conversely, what is the franchisor’s involvement if we decide to remove the brand or close the property to save the franchise costs?
Answer: In many cases, the borrower will already have been legally determined in default, and is merely being allowed to continue on a month-to-month basis under some temporary agreement. In any event, the receiver would never enter into a multi-year franchise agreement that might extend well beyond the receivership period itself.
In the case of shutting the property down or removing the brand to save costs, the franchisor cannot force the receiver to continue operating under its brand, nor can it force a lender to do so upon foreclosure. It is entitled, however, to demand immediate removal of all signs, logos, unique color schemes, branded merchandise and other trademarked materials within a short notice period.
Comfort Letter: Parent-firm’s letter, issued to reassure a subsidiary-firm’s lender or supplier, that it would support the subsidiary in case of financial difficulties. Specific terminology used in the letter determines whether such assurance constitutes a binding contract or only a moral obligation.
Trigild was appointed receiver for three apartment complexs in Florida, one which is Section 8 Housing. All three are overseen by Trigild’s Florida regional office and are managed by a Trigild affiliated multifamily management company. Additionally, Trigild was appointed receiver for four operating casual dinning restaurants in Oklahoma, Arkansas and Louisiana.