Franchising and Consumer Markets Update 2

In light of developments in the last few days, a critical and pressing issue for those businesses with a ‘bricks-and-mortar’ presence is:

How do I prepare for, survive and implement a forced shutdown?

and

What if I need to shut down my network in advance of a government directive to do so?

Understand your legal rights as tenant under leases

Government intervention in the commercial leasing space, to enhance tenant’s rights during the COVID-19 crisis, is being discussed at the moment.

In the meantime, consider the following fundamental issues. Overall, you need to be informed as to your legal rights, but use the commercial leverage at your disposal.

What if the landlord closes the premises in the absence of a government directive?

This may comprise a breach of the lease (eg rights to quiet enjoyment). You should check the position under your leases. In any correspondence you should maintain your right to claim damages as a result of any breach (including abatement for the period of the closure).

What if the premises are required to close as a matter of law?

Such an action would be outside the control of the landlord and tenant.

Unlike other contracts, leases do not typically contain a force majeure clause that would cover this circumstance.

The forced closure of premises may trigger an express provision in some leases for rent and outgoings abatement if a tenant cannot use or access the premises. However, the rent abatement provision in most leases is only triggered where there is damage or destruction of the premises or centre.

Can a tenant terminate a lease and ‘walk away’ on the grounds of frustration?

Typically the answer to this question will be no, but it depends on the circumstances and the terms of the lease.

In the absence of a force majeure provision it is sometime possible to rely on common law frustration. Frustration occurs when, without fault of either party, a contractual obligation becomes incapable of performance because of an unforeseen event that makes it radically different to a degree not contemplated by the parties. If frustrated, the contract is terminated automatically and future obligations are discharged.

Establishing frustration is difficult. It requires more than a change in temporary circumstances making performance more difficult or less profitable. During the SARS epidemic, Hong Kong courts determined that frustration was not justified where the duration of the epidemic was not expected to last for the unexpired term of the lease or, at least, for a long period of that unexpired term. This is likely to be instructive for Australian courts.

Can you force franchisees to close their businesses in the absence of a Government directive?

Franchisees are independent business owners. A franchisors only rights are as set out in the terms of the franchise agreement or at law. A franchisor may consider that a closure of the network, the absence of a government directive, is justified, necessary and essential on the grounds of public health and safety for example. If a franchisor wishes to explore this option for this reason, or to avoid critical solvency issues, we suggest:

Engaging with the network

Franchisors and franchisees must work through these issues together. As all good franchisors will, we recommend engaging with the network and franchisee advisory committees to determine and agree on the best way forward.

Any decision of this nature would only be made if there were no other viable options remaining and after taking into account the implications of the decision on franchisees, individuals and their livelihoods.

Understanding your legal rights under the franchise agreement

You should obtain a clear understanding of your rights as franchisor under force majeure clauses or to provide directions to franchisees regarding opening hours and working conditions.

As an option of absolute last resort, franchisors would need to have formed a view as to whether the COVID-19 pandemic triggers a right to immediate termination on the grounds of endangerment of public health and safety.

If sites are closed, what happens to employees?

Engaged and skilled employees are critical to the long term success of the business once we ‘come out the other side’. How is it appropriate to manage your workforce, or to provide guidance to franchisees as to how to manage their workforces, if there is a voluntary or forced shutdown?

Can you stand down employees because of COVID, rather than make them redundant?

The answer is possibly, depending on the circumstances. This is a difficult issue given that the Government’s position is, at least today, that only some businesses present an unacceptable risk to the community if they continue to operate.

Employers can use the stand down provisions in their enterprise agreements (if they have one), in employees’ contracts (if they deal with the issue) or failing that, in the Fair Work Act 2009 (Cth). But doing so might expose you to proceedings in the Fair Work Commission if you stand employees down without considering the key requirements imposed under the Act.

If premises are closed, and a business has absolutely no work for employees, the options are relatively limited.

If Government directs closure, that is a stoppage of work for which the employer cannot be held responsible and stand down without pay is likely to be an option.

But an employer deciding to close when not required by Government to do so is a voluntary decision of the employer, no matter how well-founded. Redundancies are more likely then.

Stand down is directed at external causes stopping work, over which the employer has no choice.

Do you want to stand down employees or are other options available?

Stand down, along with redundancy, is an option of last resort.

However, if you are not there yet, are there viable alternatives? For example, would employees voluntarily agree to take accrued holidays or move to a part time arrangement? Taking accrued annual leave reduces your liabilities but requires cashflow to pay for it. It does however give employees some income.

The circumstances are changing quickly, unpredictably and often significantly. If we can assist you in this period, please get in touch. In circumstances such as these, a collaborative and commercial approach is vital - we can draw upon experts in various fields to assist you and your business as we move through the changing conditions.