What happens if the Assignor defaults on the Franchise Agreement for the Fat Shack restaurant?
Fat_Shack Franchise · 2025 FDDAnswer from 2025 FDD Document
In that event, (i) the FAT SHACK Restaurant(s) associated with the Franchise Transfer shall continue to be counted as FAT SHACK Restaurant(s) to be developed under this Development Agreement, (ii) the Franchise Agreement(s) associated with the Franchise Transfer shall continue to be included in the cumulative number of FAT SHACK Restaurants required to be opened and continuously operated in the Protected Area, regardless of whether the applicable Franchise Agreement is transferred to the transferee or the transferee executes a new Franchise Agreement, (iii) the exclusive rights granted to Franchisee in this Development Agreement shall be modified to permit the transferee of the Franchise Transfer to operate in the Protected Area, and (iv) a default by the transferee of the Franchise Agreement related to a Franchise Transfer shall constitute grounds for a default to be declared under this Development Agreement pursuant to Section 4.3 hereof.
Source: Item 23 — Receipts (FDD pages 53–223)
What This Means (2025 FDD)
Based on the 2025 Fat Shack Franchise Disclosure Document, the consequences of defaulting on a Franchise Agreement that has been transferred are outlined within the context of a Development Agreement. If a franchisee with a Development Agreement transfers a Fat Shack restaurant and then defaults on the Franchise Agreement, the restaurants associated with the transfer will still count toward the development requirements under the Development Agreement. The Franchise Agreements will continue to be included in the cumulative number of Fat Shack restaurants required to be opened and operated in the protected area, regardless of whether the agreement is transferred or a new one is executed. The exclusive rights granted to the franchisee in the Development Agreement will be modified to allow the transferee to operate in the protected area. Furthermore, any default by the transferee of the Franchise Agreement related to the transfer can be considered grounds for a default under the original Development Agreement.
This means that even if the new operator (transferee) fails to meet the obligations of the Franchise Agreement, the original franchisee (assignor) who holds the Development Agreement can be held responsible. This creates a situation where the assignor's broader development rights are contingent on the success and compliance of the transferee. This clause ensures that Fat Shack can maintain its development schedule and operational standards within the protected area, even if a transfer occurs and the new operator falters.
For a prospective Fat Shack franchisee, this highlights the importance of carefully vetting any potential transferees. The original franchisee remains exposed to potential defaults by the transferee, which could jeopardize their entire Development Agreement. This provision acts as a safeguard for Fat Shack, ensuring continued development and operation within a given territory, but it places a significant responsibility on the original franchisee to ensure the transferee's competence and adherence to the franchise agreement.