Restaurant Franchise Attorney in New York City

A restaurant franchise is sold as a business in a box: proven concept, national marketing, operational support, and a lower failure rate than an independent restaurant. Some of that is true. What is always true is that the franchise agreement is a ten to twenty year contract, drafted entirely by the franchisor, that governs where you may operate, what you must buy and from whom, how much you must spend on remodeling, what you may do after it ends, and who decides whether you have breached.

The Law Offices of Albert Goodwin represents prospective and current restaurant franchisees in New York City, and advises restaurant concepts that are considering franchising their own brand.

Before You Sign: Reading the Franchise Disclosure Document

Under the Federal Trade Commission's Franchise Rule, a franchisor must provide a Franchise Disclosure Document at least fourteen calendar days before the prospective franchisee signs any binding agreement or pays any money. New York adds its own layer, discussed below, with its own timing requirement. That waiting period exists for a reason, and using it is the single most valuable thing a prospective franchisee can do.

The FDD's twenty-three items are not equally important. The ones that determine outcomes are:

• Item 3, litigation. A pattern of franchisor lawsuits against its own franchisees says more about the system than any brochure.
• Item 5 and Item 6, fees. The initial fee is rarely the issue. The royalty, the advertising fund contribution, the technology fee, the required software subscriptions, transfer fees, and renewal fees compound over the term.
• Item 7, estimated initial investment. Compare it to actual build-out costs in New York City, which routinely exceed the national ranges that the franchisor published.
• Item 8, sources of products and services. Mandatory suppliers, approved vendor programs, and rebates the franchisor receives from those suppliers. Where the franchisor profits from required purchases, that revenue stream is effectively an additional royalty.
• Item 12, territory. Whether any territory is exclusive, whether the franchisor may open company units or other channels nearby, and whether delivery and third-party platform sales into your area are protected. In dense markets this is where franchisees are most often disappointed.
• Item 19, financial performance representations. If there is none, the franchisor has told you nothing about what a unit earns, and any oral projection from a salesperson contradicts the agreement's integration and disclaimer clauses.
• Item 20, outlet tables. Openings, closures, terminations, non-renewals, and transfers over three years. A system with heavy closures and transfers in New York is telling you something specific.
• Item 21, financial statements. A franchisor with weak financials may not be able to deliver the support it promises.

The New York Franchise Sales Act

New York is a registration state. Article 33 of the General Business Law requires that a franchise offered or sold in New York be registered with the Department of Law, or qualify for an exemption, and requires delivery of the prospectus to the prospective franchisee within the time the statute specifies. The Act also contains antifraud provisions prohibiting untrue statements of material fact and omissions of material facts in connection with the offer or sale of a franchise.

The remedies matter. The Act provides for civil liability, including rescission in appropriate circumstances, and its reach is broader than common law fraud because a franchisee need not prove every element that a fraud claim requires. Provisions in a franchise agreement purporting to waive compliance with the Act are void. A franchisor that sold an unregistered franchise in New York, or that made material misrepresentations in the sales process, faces exposure that the agreement's disclaimers do not resolve.

New York also has a statute governing termination of franchises in certain circumstances, and franchise agreements frequently contain out-of-state venue and choice of law clauses intended to escape New York protections. Whether those clauses are enforceable in a given case is worth analyzing before assuming the dispute must be litigated in the franchisor's home state.

Negotiating the Franchise Agreement

Franchisors say the agreement is non-negotiable. For a first-time single unit buyer that is often close to true, but not entirely. Items that experienced counsel does obtain, particularly for multi-unit deals or well-capitalized operators, include a defined protected territory with measurable boundaries, a cure period extension for defaults that are not health or safety related, a cap or notice requirement on remodeling obligations, relief from personal guaranty exposure after a transfer, modification of the post-term non-compete radius to something enforceable in New York City density, a right to transfer to a qualified buyer with consent not unreasonably withheld, and clarification of how delivery platform sales are counted for royalty and territory purposes.

The personal guaranty deserves particular attention. Most franchise agreements are guaranteed personally by the owners, and that guaranty typically covers not just royalties but the franchisor's future lost royalties over the remaining term if the agreement is terminated for cause. That is a far larger number than most franchisees realize. See personal guaranty enforcement.

Disputes During the Term

• Encroachment. A new unit, a company store, a ghost kitchen, or a delivery-only license operating inside what you understood to be your area.
• Required remodeling and technology upgrades mandated mid-term at a cost that no financial model contemplated.
• Supply chain and pricing. Mandatory purchases at above-market prices, with the franchisor collecting supplier rebates.
• Advertising fund accounting. Whether contributions are actually spent on advertising that benefits your unit, and whether you have a right to an accounting.
• Default notices. Franchisors issue notices to default for operational scores, reporting failures, and late payments. Cure periods are short and the notice provisions must be followed precisely, by both sides.
• Transfer and renewal. Consent conditions, transfer fees, required upgrades as a condition of renewal, and general releases demanded as the price of either.

Termination and What Comes After

Termination is not the end of the obligations. Post-term provisions typically require de-identification of the premises, return of manuals and proprietary materials, assignment of the telephone number and digital assets, and compliance with a non-compete restricting operation of a competing restaurant at the location or within a radius for a period of years. Franchisors also frequently hold an option to purchase the assets, or a lease assignment right that allows them to take over the location entirely, which is why the interaction between the franchise agreement and the premises lease should be understood before signing either.

Defending a termination involves examining whether the alleged default was actually a default under the agreement, whether proper notice and cure opportunity were given, whether the franchisor waived the breach through a course of conduct, and whether the franchisor's own failures excuse performance. Where the relationship cannot be saved, the objective becomes a negotiated exit that limits the lost future royalties claim and releases the guarantors.

See franchise disputes, non-compete defense, and breach of contract.

Franchising Your Own Restaurant Concept

Independent operators with a successful concept often consider franchising, and frequently begin by doing something that is legally a franchise sale without realizing it. A franchise exists where the three elements are present: a grant of the right to operate under the franchisor's mark, significant control or assistance, and a required fee. Labeling the arrangement a license, a partnership, or a management agreement does not change the analysis, and offering it without a compliant FDD and New York registration creates rescission exposure and regulatory risk.

Doing it properly requires an FDD, a franchise agreement, financial statements meeting the disclosure requirements, registration in New York and any other registration states, operations manuals, and trademark registration that is actually in place before the marks are licensed. See trademark registration and licensing agreements.

You can contact us by phone at 212-233-1233 or by email at [email protected].