Some basic precedents are available on the website. This section seeks to explain some of the basic reasoning behind the main clauses. The following comments generally apply not only to unit franchises but also to development and master franchise agreements, unless expressly stated otherwise.

The Grant

A franchise involves the franchisor in granting the franchisee certain rights over a certain area for a specified period. Exactly what those rights, the area and period are, is a matter of negotiation between the franchisor and the intending franchisee. Little, if anything, is open to negotiation with domestic franchising but, on the international scene, it is quite the opposite and both parties must carefully think through what they want out of the relationship to make it worthwhile.

System and intellectual property rights

Any franchise agreement must permit the franchisee to use the franchisor's system together with its name and trade marks. Clauses protecting this intellectual property and ensuring that the franchisees do not abuse it.

Territory

It is usual for the franchisee to want as large an area as possible so as to give it the largest possible return on its investment. The franchisor, however, must only decide upon what territory it is willing to grant after taking account of a number of criteria concerning the territory and the franchisee.

The territory should be one geographical, political, cultural and economic unit, which allows a planned approach to development of the franchise. Allowing the franchisee to take on an additional small nearby territory, merely because of its geographical proximity, will often lead to it being under-exploited. The geographical distance, cultural and political differences need to be taken into account when deciding upon the size of the territory. Many US franchisors, naively believing what they have read about the EU being a "single market", have made the mistake of granting Pan-European rights to developers/master franchisees who are ill-equipped to properly exploit the full territory.

In an international or regional franchise, the franchisee's skills and resources are another vital consideration when deciding the geographical scope of the territory. Inadequate resources will by necessity mean that the whole territory will not be systematically exploited and will be limited, not by the suitability of the system to the territory, but by the franchisee's inability to properly expand it. The business plan which the potential franchisee presents will, in part, reflect any deficiencies in resources it has. However that does not mean that conservative business plans are always indicative of an under-resourced franchisee. It can be a sign of market knowledge. It is therefore necessary to vet carefully the potential sub-franchisor/developer by way of bank and trade references and company searches.

Incorporation of any business plan into the development schedule will help encourage a realistic approach to it by the franchisee and so enable the franchisor to gauge its resources more accurately.

Exclusivity

The franchisee will inevitably demand exclusivity in order to give it the comfort of knowing that it will not be in competition with a third party and that its investment is more secure.

From the franchisor's point of view, exclusivity should not be objectionable so long as the franchisee has been properly vetted, the size of the territory sensibly decided and a proper development schedule agreed upon.

It should be borne in mind however that the grant of exclusivity may cause anti-trust law problems in some jurisdictions. In the European Community it is possible to grant exclusivity only if it has been granted individual exemption under article 81(3) of the Treaty of Rome or comes within the de minimis exemption. Even then it is subject to the laws of each member state.

Term and renewal

It is common, but by no means universal, for franchisee agreements to be granted for a period of between five and ten years. Pan EU agreements are usually longer between 10 and 25 years. Such a term is thought to be necessary in order for the franchisee to obtain a decent return on its investment. Generally, the grant of such a term is neither controversial nor legally difficult.

In some jurisdictions however, there is a restriction imposed by the government upon the maximum possible term.

However, problems are common over the often vexed question of renewal and what happens to franchisees in the event of non-renewal. There are various schools of thought on these issues but the reality is that by and large, international business format franchising is still in its infancy and the problems involved in renewal and non-renewal have not yet had to be faced by many international franchisors.

In Pan-EU agreements it is considered more wise, owing to the potential strength of the franchisee and the long initial term, not to grant an automatic right of renewal but to provide for both parties to negotiate for a new term if they are minded to do so. Clearly, if the franchise is doing well and 'human relations' between the parties are good, the chances of negotiating a new agreement are high. What, however, happens if all is not well?

The most difficult problem relates to the terms being granted to franchisees. Usually franchisees will be granted an automatic right of renewal subject to there being no existing breach and the franchisee updating its outlets as required by the sub-franchisor. What if the franchise is granted in year 20 of a 25-year master licence which is not subsequently renewed?

Key man

It may be that the franchisor is making the grant to the franchisee mainly because of the personal attributes of one of its key employees. In such a case it is essential that the agreement stipulates clearly the importance of that individual's role in the scheme of things. It is also vital that the grant is made conditional on the continued efforts and employment of that individual by the franchisee. Termination of the key man's full-time employment in the franchise should be a material breach of the terms of the grant and be grounds for termination.

Clearly provision must be made for the key man's death, invalidity and retirement. It may in any event only be felt necessary by the franchisor to apply the key man clause for, say, the first 5 years of the term, when the franchise is becoming established in the territory and most needs the key man's talents.

Such a provision will prevent the prime mover of the franchisee from deserting the franchise prematurely, as well as guarding the franchise from a management reorganisation that could remove him from his position and so deprive the franchise of the key man's particular talents.