If Cinnaholic terminates the Franchise Agreement due to the franchisee's default, is the franchisee obligated to pay liquidated damages?
Cinnaholic Franchise · 2025 FDDAnswer from 2025 FDD Document
[Item 22: CONTRACTS]
22. EFFECT OF AND OBLIGATIONS UPON TERMINATION
- 22.1. Liquidated Damages. Franchisee acknowledges and confirms that by granting Franchisee the license to operate the Bakery in the Franchise Territory, Franchisor lost the opportunity to grant a franchise for the Franchise Territory to another person or entity or to itself to own and operate a Bakery within the Franchise Territory. Additionally, Franchisee confirms that Franchisor will suffer substantial damages by virtue of the termination of this Agreement, including, without limitation, lost Royalty Fees, lost market penetration and goodwill in the Franchise Territory, lost opportunity costs and the expense Franchisor will incur in developing another franchise for the Franchise Territory, which damages are impractical and extremely difficult to ascertain and/or calculate accurately, and the proof of which would be burdensome and costly, although such damages are real and meaningful to Franchisor and the CINNAHOLIC® System. Accordingly, in the event that Franchisor terminates this Agreement for Franchisee's default hereunder, Franchisee agrees to pay to Franchisor in a lump sum on the effective date of termination, liquidated damages, which represents a fair and reasonable estimate of Franchisor's foreseeable losses as a result of such termination, and which are not in any way intended to be a penalty, in an amount determined as follows:
- (i) the average annual amount of Royalty Fees payable by Franchisee to Franchisor for the two years immediately preceding the date of termination provided, however, if the Bakery has not been open for at least two years, the average monthly amount of Royalty Fees payable by Franchisee to Franchisor for the months in which the Bakery has been open multiplied by 12;
- (ii) multiplied by two; however, if the Franchise Agreement term has less than two years remaining, then multiply by the number of years (or portions of a year) remaining in the term.
Franchisee acknowledges that its obligation to pay Franchisor liquidated damages is in addition to, not in lieu of, Franchisee's obligations to pay other amounts due to Franchisor under this Agreement up to the date of termination and to strictly comply with any other post-termination obligations required hereunder. Should any valid, applicable law or regulation of a competent governmental authority having jurisdiction over this Agreement limit Franchisee's ability to pay, and Franchisor's ability to receive, such liquidated damages, Franchisee shall be liable to Franchisor for any and all damages which it incurs, now or in the future, as a result of Franchisee's default under this Agreement.
Source: Item 22 — CONTRACTS (FDD pages 61–62)
What This Means (2025 FDD)
According to Cinnaholic's 2025 Franchise Disclosure Document, if Cinnaholic terminates the Franchise Agreement due to the franchisee's default, the franchisee must pay liquidated damages to Cinnaholic. The FDD states that Cinnaholic loses the opportunity to grant a franchise to another party when granting a franchise. Cinnaholic will suffer substantial damages from the termination, including lost Royalty Fees, lost market penetration and goodwill, lost opportunity costs, and expenses to develop another franchise. These damages are impractical and extremely difficult to ascertain or calculate accurately.
The liquidated damages represent a fair and reasonable estimate of Cinnaholic's foreseeable losses and are not intended as a penalty. The amount is calculated as the average annual Royalty Fees payable by the franchisee for the two years immediately preceding the termination date, or if the bakery has not been open for two years, the average monthly Royalty Fees multiplied by 12. This amount is then multiplied by two, or if the Franchise Agreement has less than two years remaining, by the number of years (or portions of a year) remaining in the term.
The franchisee's obligation to pay liquidated damages is in addition to, not in lieu of, the franchisee's obligations to pay other amounts due to Cinnaholic under the agreement up to the termination date and to comply with any other post-termination obligations. If any law or regulation limits the franchisee's ability to pay or Cinnaholic's ability to receive such liquidated damages, the franchisee is liable to Cinnaholic for any and all damages it incurs as a result of the franchisee's default under the agreement.
It is important for prospective Cinnaholic franchisees to understand how these liquidated damages are calculated and under what circumstances they may be imposed, as termination due to default can result in significant financial obligations beyond the initial investment.