California Gov. Jerry Brown has signed a new franchise protection law that amends the California Franchise Relationship Act to provide California franchisees more rights against termination and penalizes franchisors for improper termination or nonrenewal of a franchise.
Under the new law — AB 525 — a franchisee will have at least 75 days to cure non-monetary faults and at least 10 days to cure regulatory violations before a franchisor can terminate the franchise agreement. The franchisor does have rights to terminate under certain emergency situations, like foreclosure, eviction or franchisee misconduct. A franchisor may also terminate for repeated violations of the franchise agreement, although the number of violations is not specified.
If a franchise agreement is terminated at the discretion of the franchisor, the new law stipulates that the franchisor must buy back any equipment, fixtures, furnishings, inventory and supplies that were paid for under the terms of the franchise agreement or a subsequent supplier agreement, at the franchisee’s depreciated value. There is no provision for leased equipment in the new law. The franchisee is also allowed to either sell or keep the equipment, etc., as well as the commercial lease. The franchisor will not have to repurchase these assets if the franchisor exits the geographical market where the franchise is located.
Under the new law, franchisees may transfer ownership of the franchise or any portion of the franchise’s equity to anyone who qualifies under the franchisor’s existing standards. Franchisors that have previously used undisclosed criteria for evaluating franchise candidates must disclose that criteria or approve all candidates. Notice and time periods for transfers are explicitly detailed under the new law, as is the content required for notices.
If a franchisor violates the CFRA termination or nonrenewal clauses, the franchisee has several remedies, including reinstatement, damages for losses incurred or reimbursement by the franchisor for the fair market value of the franchise.
The law goes into effect for new or renewing franchise agreements in California after December 31, 2015.
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