Franchise & Distribution: COVID-19 Client Bulletin

by Lewitt Hackman’s Franchise & Distribution Practice Group

COVID-19 has impacted the franchise industry heavily.  Stores have been forced to close or open only for pickup or delivery.  How to deal with bills, including rent and debt service, while little or no revenue is generated, staying afloat during the crisis and obligations to employees have created deep concerns in the industry. Lewitt Hackman’s recommendations to clients in franchising and product/service distribution to address the COVID-19 Crisis have included the following:

• Invoke force majeure clauses in business contracts as basis for relief from obligations that have become burdensome.

• Where the contract is silent or narrow, invoke legal force majeure, which exists outside of and apart from the contract terms.  For example, see California, Civil Code Section 1511(2).

• Where another party to the contract has invoked force majeure improperly or too broadly, carefully analyze to refute the overbroad invocation of force majeure. Sometimes it is possible to identify workarounds as ways the other party can continue to perform.

• Disrupted businesses should ask their insurance agent/broker if their insurance includes any form of business interruption coverage and if so, tender should be made.  Consider tendering regardless of policy scope.

• Businesses that have added or expanded delivery services should notify their insurance agent/broker or carrier of the changes to confirm liability coverage is extended to these new or expanded services.

• If the Coronavirus has been identified as present at a location, that may be an additional and under some policies a potentially stronger ground for business interruption benefits.

• Franchise companies and distribution businesses permitted to remain open and operating, may wish to provide personnel, suppliers, distributors and resellers a “Request for Permission to Pass” legal letter, to provide to law enforcement, public health officials and others who may stop or question the person’s activities.

• For the above exposed to being stopped by authorities, or public shaming for operating, vehicles may display a placard stating prominently that the vehicle is engaged in business in a Department of Homeland Security Critical Infrastructure sector or a state defined Essential Business category.

• A business should not have more than $250,000 (FDIC insurance limit) in any one bank, credit union or the like. The government does not give advance warning that an institution is about to fail. Amounts in excess of the FDIC Insurance limit may be lost. (There are rules and steps that can be taken to have more than $250,000 in a bank and be insured, but it is simplest to not have more in one bank).

• Franchisors and potential franchisees or transferees negotiating franchise and development agreements should consider addendums to extend deadlines for openings. This is to address obstacles to opening such as: delays in training, getting licenses and permits, site selection and leasing.  Parties may consider discussing other issues that impact the system’s ability to operate as it did before the crisis, e.g. supply chain disruptions, business closure orders or gathering restrictions, employment needs, IT options, etc. before signing agreements.

• Some franchisors are consenting to temporary royalty and advertising fund relief by deferring or reducing these payments.  Others, for good reason in particular systems, are declining, given that royalties and ad fund contributions are just a percentage of revenue.  If revenues are down, royalties/advertising contributions will likewise be reduced.

• Franchisees may look to their franchisors for direction. Franchisors should assess current issues and develop interim policies for franchisees to follow, keeping in mind circumstances may change day-to-day.

• Landlords are generally cooperating in consenting to some form of rental relief.  Where landlords do not cooperate, consideration should be given to invoking force majeure. (See #1 and #2 above).

• Contact lenders to request deferral of debt service obligations if circumstances warrant.

• Reduce operating expenses if possible.

• With closure of many courts, for disputes needing immediate attention, private expedited mediation or private expedited arbitration can be considered.  Mediations and arbitrations are increasingly being conducted by video conference.

• Consult an employment attorney on how and whether to furlough or lay off personnel, including WARN Act considerations. Lewitt Hackman’s employment lawyers can assist.

• Many small business loans are expected to be available to help businesses stay afloat during the crisis. Here are links to some options:

www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources

ewddlacity.com/index.php/microloan-program

www.ibank.ca.gov/small-business-finance-center/

• Stay in communication with professional advisors. Look to them for advice and support tailored to your circumstances.

• If government orders are unfairly impacting your business, contact any of the attorneys at Lewitt Hackman. Some clients have begun to confer with us, raising legitimate questions about various aspects of the government orders.   We are prepared to challenge orders that go beyond the government’s authority.

This Bulletin focuses on legal matters.  But it is essential, and highest priority, to take care of your own physical and mental health, and the health of your loved ones, employees, family and friends. If you feel ill, get help. At Lewitt Hackman, we are following the guidance of government officials and complying with federal, state and local directives concerning the operation of our law firm and office. We generally recommend that clients do the same.

We continue to monitor developments and regularly update our website with Coronavirus Resources for clients, where you will find relevant topics pertaining to your business, legal updates, and government resources.

This information provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact or situation.