Opportunity For Prospective Franchisees to Review The Franchise Agreement

Opportunity For Prospective Franchisees to Review The Franchise Agreement

Except in limited circumstances, the amended Franchise Rule eliminates the original Rule’s requirement that prospective franchisees always have at least five business days in which to review the completed franchise agreement. Under the amended Rule, it is only if the franchisor has unilaterally and materially altered the terms and conditions of the basic franchise agreement (or any related agreement) attached to the disclosure document previously furnished to a prospective franchisee that the franchisor is required to afford the prospective franchisee additional time – now seven calendar days – to review it before the revised agreement is signed. This does not include instances where changes to the agreement arise out of negotiations initiated by the prospective franchisee.

Unilateral Material Modifications by the Franchisor

The mandatory seven calendar day review period does not apply where the only differences between the standard agreements and the completed agreements are non-substantive “fill-in-the-blank” provisions, such as the date, name, and address of the franchisee. The addition of substantive terms such as a specific radius or geographic area comprising a protected territory, the actual number of stores to be opened pursuant to an area development agreement, the specific interest rate payable by the franchisee, or other contractual terms that were not previously disclosed in the basic disclosure document or its attachments will trigger the seven
calendar day review period.

Unilateral Material Modifications by the Franchisee

The amended Rule expressly exempts from the seven calendar day review period changes to a previously disclosed franchise or other agreement where such changes were initiated at the prospective franchisee’s request. When a prospective franchisee is the party introducing contract modifications, the seven calendar day review period is not required. Even if some of the changes benefit the franchisor, changes made under these circumstances will be considered initiated by the prospective franchisee. Whether or not a particular change benefits one party or the other is irrelevant. What is determinative is whether the prospective franchisee has knowledge of the change before signing the agreement. As long as the prospective franchisee has initiated the process of revising documents that previously have been presented for signing, any discussions about changes, and any agreed upon changes thereafter, are clearly made with the prospective franchisee’s knowledge.

CREDIT: The content of this post has been taken from the Federal Trade Commission’s document, Franchise Rule Compliance Guide.