If an Exit franchisee pledges their interest in the agreement, is that a default?
Exit Franchise · 2025 FDDAnswer from 2025 FDD Document
- (iii) Franchisee, directly or indirectly, sells, leases, assigns, transfers, conveys, gives away, pledges, mortgages or encumbers any interest in this Agreement, or in any way removes the franchise granted by this Agreement from the actual or legal supervision or control of Franchisee, or attempts to do any of same without the prior written consent of Subfranchisor; or if Franchisee is a corporation a partnership or other legal entity, if any interest in the entity is assigned or transferred without the prior written consent of the Subfranchisor.
Source: Item 23 — RECEIPT (FDD pages 42–235)
What This Means (2025 FDD)
According to Exit's 2025 Franchise Disclosure Document, pledging interest in the franchise agreement without prior written consent from the subfranchisor constitutes an event of default. Specifically, if a franchisee directly or indirectly pledges any interest in the agreement, or attempts to do so, without obtaining written consent, the subfranchisor has the right to terminate the agreement, provided they give notice to the franchisee.
This provision protects the subfranchisor's investment and control over the franchise by ensuring that the franchisee cannot transfer or encumber the franchise rights without approval. This is a fairly standard clause in franchise agreements, as franchisors want to carefully control who operates under their brand and ensure that any transfer meets their standards.
For a prospective Exit franchisee, this means that you cannot use your franchise agreement as collateral for a loan or any other financial obligation without first getting permission from the subfranchisor. Failing to do so could result in the termination of your franchise agreement. It is important to maintain open communication with the subfranchisor and seek their consent for any such actions to avoid potential default and termination.