Area developers, also known as multi-unit operators, will often see the term “cross-default” in their franchise agreements. Though the term might look like standard legalese, cross-default provisions can make or break an area developer’s units and progress.
NY franchisees regularly read our Insights column and have asked us to explore this issue further. Let’s discuss the importance of the cross-default clause in a franchise agreement and what NY franchisees need to know.
What is a Cross-Default Clause?
A cross-default clause or provision typically provides the franchisor with the right to declare a franchisee’s default under one of the franchisee’s franchise agreements if the franchisee (or its affiliates) is in default under its other franchise agreements (even if the franchisee has not otherwise defaulted under the first franchise agreement). This provision gives the franchisor the ability to oust an operator from the system due to a default in any of its franchises.
Examples That Could Trigger a Cross-Default Clause
- One Location Does Not Open. The cross-default provision may be triggered by failure during development. Area developers commonly miss their development deadlines, even through no fault of their own. Nevertheless, if a developer fails to timely open a location, it could be deemed a default under the developer’s existing franchise agreements for its other open locations.
- Repeated Health and Safety Violations. Imagine a franchisee operating multiple fast-food restaurant locations. If the franchisor discovers that one location has persistent and serious health and safety violations, such as unsanitary food preparation areas or failure to comply with local health department standards, the franchisor could invoke the cross-default clause and shut down all of the franchisee’s locations.
- Non-Payment of Fees. If the franchisee repeatedly fails to pay the required royalties, advertising fees, or other financial obligations for one location, the franchisor might invoke a cross-default clause to terminate the franchise agreements for all their locations. The reaction may seem extreme, but non-payment in one location could indicate broader financial instability, putting the franchisor at risk of not receiving payments across the board.
The common thread of these examples is their impact the reputation of the franchise system and the franchisor’s bottom line. A cross-default clause allows the franchisor to expel multi-unit operators from the system if they are not fully compliant with all of their franchise agreements.
How a NY Franchise Lawyer Can Help Multi-Unit Operators Avoid Triggering the Cross-Default Clause
Many area developers are not cognizant of the extent of their commitment to the franchisor and there are ways to limit the franchisor’s influence on area development. While negotiating the area development agreement, multi-unit operators should collaborate with their NY franchise lawyer to, inter alia, clarify the terms of the cross-default provision and provide a mechanism for addressing breaches or failures to perform.
A NY franchise lawyer can fight for the developer’s rights during the negotiation stage with the franchisor. For example, they will want to ensure that a failure by the developer to meet its development obligations will not result in the termination of the developer’s existing franchise agreements.
Contact Lusthaus Law
Area development can be lucrative and strengthen a franchisee’s portfolio and reputation, but it also carries significant risks. Lusthaus Law has the necessary experience to help protect the rights of franchisees and area developers, navigate the legal compliance issues, and negotiate the agreements needed to implement successful area development.
Lusthaus Law’s website is a resource for New York franchisors and franchisees. We have published two downloadable and complimentary e-books and our Insights series is regularly updated to reflect industry trends affecting multi-unit operators.Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path for your franchise’s successful future.
