New Franchise Rules in Effect in California

New Franchise Rules in Effect in California

     California franchisees have new legal protections against a franchisor’s termination or non-renewal without cause and refusals to transfer. Later last year the California Franchise Relations Act (CFRA) was significantly revised to offer franchisees greater protections against franchisor actions. Only 18 states have legislation restricting the franchisor-franchisee relationship, often affecting the franchisor’s right to terminate or renew without good cause. California now has one of the strongest protections for franchisees with the amendments. Here is a summary of the revisions to affecting California franchises.

     Franchisors are now prohibited from terminating a franchise agreement without good cause. Good cause is now defined as the franchisee committing a “substantial and material breach” of the franchise agreement. The previous definition of having good cause to terminate was simply “the failure of the franchisee to comply with any lawful requirement of the franchise agreement.” The stronger definition and prohibition of termination without good cause makes it imperative that franchisors doing business in California monitor there franchisees and keep records of any issues relating to the franchise agreement.

     The latest revision to the CFRA also extends the mandatory notice and cure period from 30 days to at least 60 days now. There are some circumstances that allow the franchisor to terminate the franchise agreement immediately after notice with no opportunity to cure. These include: franchisee’s insolvency, abandonment, failure to comply with laws, conviction of a felony, or failure to pay amounts due to the franchisor within five days after receiving written notice of the amount due.

     Under the new revisions, when a franchisor has successfully terminated a franchise agreement, the franchisor will be required to purchase all inventory, supplies, equipment, fixtures, and furnishing that the franchisee used in the operation. The purchase will be at the depreciated book value which helps defray the cost for returned products. If the franchisor has completely withdrawn from the geographic market area where the franchise is located this provision does not apply.

     One of the most substantial changes is the CFRA’s new protection of the franchisee’s right to assign. The new amendments prevent the franchisor from rejecting an otherwise qualified transferee under the franchisor’s own standard qualifications. The law still protects the franchisor’s first right of refusal if there are any in the franchise agreement. As a concession for franchisors a transferring franchisee is required to provide prior written notice of any sale of the business or interest in the business. The notice must include all agreements relating to the sale and an application from the potential assignee to become a franchisee.

     The new revisions to the CFRA came into effect January 1, 2016 for franchisors in California. While California is already known for its stringent franchise rules and regulations these revisions are not likely to negatively affect the many franchisees and franchisors operating within the state. If you are a franchisor who is or plans to operate within California, be sure to appraise yourself and your franchise system of the new rules. For a free consultation on franchising your business call Reidel Law Firm today at (832)510-3292 or use the contact form below.