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Franchises: To Keep, Not to Keep, and is it Your Choice?

Question: Our borrower is in default and we are concerned that the franchise agreement may also b e 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 f ranchisor 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 f ranchis or will want to keep the location in their chain, and also continue to collect royalt y 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 oper ating. 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 propert y, and interest f rom other franchisees as buyers, etc.

Question: If we want to keep the brand, will th e 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.

Legal Definitions

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 News

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.

About Trigild

Trigild is the only non-performing commercial loan specialist that combines receivership trustee, management and disposition services under one roof. That means no coordinating multiple companies, and no duplication of fees. We have the expertise to quickly take control of the assets, maximize operating results, and speed recovery by selling the assets quickly through our national network of industry contacts. This is our core business, not a sideline. The results? Absolute certainty that you will achieve maximum loan recovery-faster, easier and more cost-effectively.

If you have a question that you would like eTips to answer, please e-mail us at eTips@trigild.com