What is the effect of a permitted transfer under Section 8 on the post-term non-competition agreement for Ella Cafe?
Ella_Cafe Franchise · 2024 FDDAnswer from 2024 FDD Document
the foregoing events or with respect to enforcement of this Section 10.2., and continuing for an uninterrupted period of two years thereafter, Developer will not, either directly or indirectly, for itself, or through, on behalf of, or in conjunction with any person, persons, or legal entity, own, maintain, advise, operate, engage in, be employed by, make loans to, invest in, provide any assistance to, or have any interest in (as an owner or otherwise) or relationship or association with any casual, fast-casual, or quick-service coffee house, retail Coffee House, coffee/food truck, kiosk, cart, or store inside store of any type, that offers coffee and/or assorted café items as a primary menu item or that derives more than 25% of its revenue from the sale of coffee and/or assorted café items, other than a Ella Coffee Company, LLC Coffee House operated pursuant to a then-currently effective Franchise Agreement with Franchisor, that: (i) is, or is intended to be, located at the location of the former Location; (ii) is within a five-mile radius of the former Location; or (iii) is within a five-mile radius of any other Coffee House operating under the System and Marks, that is in existence or under development at any location within the United States, its territories, or commonwealths, or any other country, province, state, or geographic area in which Franchisor or its Affiliates have used, sought registration of, or registered the Marks or similar marks, or operate or license others to operate a business under the Marks or similar marks, at the time of such expiration, termination, or transfer. If any Owner ceases to be an Owner of Developer for any reason during the Term of this Agreement, the foregoing covenant will apply to the departing Owner for a two-year period beginning on the date such person ceases to meet the definition of an Owner. The time periods relating to the obligations described in this Section 10.2. will be tolled during any period of noncompliance.
Source: Item 23 — RECEIPTS (FDD pages 50–181)
What This Means (2024 FDD)
Based on the 2024 FDD, if an Ella Cafe developer transfers their interest in the Development Agreement, the term of the agreement for the transferee will be the remaining term of the original agreement at the time of transfer. This means the new developer steps into the shoes of the previous one for the balance of the original term. The FDD does not specifically address how a transfer under Section 8 affects the post-term non-competition agreement. However, Section 10.2 outlines the post-term non-compete agreement.
According to Section 10.2, for two years after the expiration, termination, or transfer of the agreement, the developer cannot be involved with any coffee house that offers coffee and/or assorted café items as a primary menu item or that derives more than 25% of its revenue from the sale of coffee and/or assorted café items. This restriction applies to locations at the former location, within a five-mile radius of the former location, or within a five-mile radius of any other Ella Cafe operating under the System and Marks. This non-compete also applies to departing owners of the developer for a two-year period from the date they cease to be an owner.
Because the FDD does not explicitly state how a transfer affects the post-term non-compete agreement, a prospective Ella Cafe franchisee should seek clarification from the franchisor regarding the implications of a transfer on the non-compete obligations. Specifically, it would be prudent to understand whether the transferee assumes the remaining non-compete obligations of the transferor, or if the transfer triggers a new non-compete period for the transferee.