Closing an unprofitable store

NUMBER 2-2 - October 19, 2007
   
QUESTION CORNER
 
Question from a franchisor: One of the franchisees in my network is having financial problems. The franchisee is on the head lease and could minimize his losses by closing the store and just paying the rent until the end of the lease (16 months). As franchisor, I agree with the closing of the store. Does the franchisee have the right to close the store and just continue paying the rent?

Answer: The closing of a store before a lease has expired may have important repercussions on the franchisee and on your franchise network. I have more questions than answers for you. Does the franchisee have a line of credit and/or a long-term loan with a financial institution? Does the franchisee have other secured creditors (General Security Agreement, P.M.S.I., etc.)? Do you have other franchisees that rent premises from the same landlord? Did the franchisee give a personal guarantee to the landlord and/or to a financial institution? Is the franchisee planning a “going out of business sale” before closing the store? The answer to these and other questions will determine the financial and other risks associated with this decision.

Given the potential repercussions for the franchisee, I strongly advise the franchisee consult a franchise attorney to determine all the possible repercussions and the costs of the options available to him under the circumstances before taking the decision to close the store.

Among other things, the franchisee should have the lease reviewed to determine if it contains any type of clause that obliges him to keep the store open and/or a default provision to ascertain if the closing of the store constitutes a breach under the terms of the lease. Many leases contain what is called a “continuous operation clause”. It obliges the tenant to keep the store open during the hours and on the days determined by the landlord. There are sometimes penalties for breaching these types of provisions.

Furthermore, the landlord usually has numerous recourses available in the event a tenant closes its store before the expiry of the term of the lease: injunction measures to oblige the franchisee to maintain the store open, a seizure before judgement to stop the tenant from selling its inventory, a claim for damages for breaching the lease, the recourses available under the general security agreement and the right of distress. In Quebec, the movable hypothec is the counterpart of a general security agreement and there no longer exists a right of distress.

If the lease contains no such clauses, as franchisor, you should evaluate the potential repercussions on your franchise network and pay special attention to the fact that other franchisees may rent premises from the same landlord.

If the lease does not contain any clauses that prevent your franchisee from closing the store, he should nevertheless give prior written notice of his decision to the landlord.

In the event the lease contains a continuous operation clause or another provision that prevents the franchisee from closing the store, what I suggest is for the franchisee to meet the landlord (and the other secured creditors, if applicable) to attempt to negotiate the early termination of the lease. If this option fails, the franchisee will be able to make a decision based on the legal opinion of his attorney and of his evaluation of the financial and other risks associated with the options available to him.

Cordially,

Claude J. Pellan, Attorney and Consultant
Franchise and Business Law
www.claudepellan.com