What constitutes a 'transfer' of a Carls franchise by the franchisee?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
| Provision | Franchise | Summary | |
|---|---|---|---|
| Agreement | |||
| c. | Requirements for you to renew or extend d. Termination by you | Section 2.B. Not Applicable | In order to renew at the end of the Initial Term you must: give timely notice; sign general release; comply with training requirements; be in good standing; not be in default under any agreement with us and our affiliates; not be in default beyond the cure period under any real estate or equipment lease or financing instrument relating to the Franchised Restaurant or any agreement with any vendor or supplier to the Franchised Restaurant; have the right to remain in possession of the Franchised Location for the Renewal Term; remodel in accordance with our then-current standards; and pay a renewal fee. You must also sign our then-current form of Franchise Agreement, the terms of which likely will differ from your original Franchise Agreement, including, without limitation, those relating to royalty fees and advertising obligations. |
| e. | Termination by us without cause | Not Applicable | |
| f. | Termination by us with cause | Section 21 | We may terminate upon default, which includes, but is not limited to, remaining in default beyond any applicable cure period under any agreement with us or our affiliates, including any Development Agreement. |
| g. "Cause" defined– curable defaults | Section 21.B. | You have 10 days to cure monetary defaults. You have 30 days to cure all other defaults except those discussed in paragraph h. below. | |
| h. "Cause" defined – non curable defaults | Sections 21.A., 21.B.(3) & 21.C. | Non-curable defaults include: closure of Franchised Restaurant for more than 5 days; insolvency; bankruptcy; execution levied on your business or property; foreclosure; material breach of covenants; transfer without our prior written consent; material misrepresentation; falsification of reports; failure to open Franchised Restaurant within 60 days after opening is authorized; imminent danger to public health or safety; loss of possession of Franchised Location; felony conviction; breach of representation or warranty; default beyond cure period under other agreements with us or our affiliates; default after receipt of 2 or more notices of default within previous 12 months; and receipt of second consecutive failing score on an inspection. | |
| i. | Your obligations on termination/nonrenewal | Section 22 | Obligations include: immediately cease operating the Franchised Restaurant; payment of amounts due; return OPM; continued observance of covenants; discontinue use of Proprietary Marks; complete de-identification of the Franchised Restaurant; and upon termination based on your default, payment of future lost royalties. |
| j. | Assignment of contract by us | Section 17 | There are no restrictions on our right to assign. |
| k. "Transfer" by you defined | Section 18.A. | Includes sale, assignment, transfer, conveyance, gift, pledge, mortgage or other encumbrance of any direct or indirect interest in you, the Franchise Agreement, the Franchise, the Franchised Restaurant, the assets of the Franchised Restaurant, the Franchised Location or any other assets pertaining to your operations under the Franchise Agreement. |
Source: Item 17 — RENEWAL, TERMINATION, TRANSFER, AND DISPUTE RESOLUTION (FDD pages 61–66)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, a 'transfer' by the franchisee includes various actions related to the franchise ownership and assets. These actions encompass not only outright sales but also other forms of conveyance or encumbrance. Understanding this definition is crucial for a prospective franchisee, as any of these actions would require franchisor approval and adherence to specific conditions outlined in the franchise agreement.
The definition of 'transfer' is broad, covering scenarios where the franchisee might seek to sell the business, assign the franchise agreement, or transfer ownership through a gift. It also extends to situations where the franchisee might pledge the business as collateral, mortgage the assets, or otherwise encumber any direct or indirect interest in the franchise. This comprehensive definition ensures that Carls maintains control over who operates its franchises and that any changes in ownership or control meet its standards.
For a prospective Carls franchisee, this means that any plan to alter the ownership structure or use the franchise as collateral for financing will be subject to the franchisor's scrutiny and approval. It is essential to carefully review Section 18.A of the Franchise Agreement to fully understand the implications of this clause and to ensure compliance with all requirements before undertaking any action that could be considered a transfer. Failure to obtain prior written consent from Carls for any of these actions could result in a breach of the franchise agreement and potential termination of the franchise.