Has your dealership ever had the curse of the cat people put on it by your franchisor?
You have if you have ever phoned your lawyer and said:
“Help! The manufacturer has only given me a one-year term franchise agreement. I can't let them put me out of business in a year!”
How is a term franchise agreement like the curse of the cat people? Because fearing the curse, which is a silly superstition, makes about as much sense as fearing a term franchise agreement.
Every state has a law providing that a manufacturer may not terminate or fail to renew a dealer without good cause. Of course, a dealer would prefer to have a permanent or long-term agreement.
However, if the franchise agreement is for one year or one month, what is the difference?
A manufacturer is required to renew the dealer agreement regardless of the time period unless the manufacturer wishes to go through a state termination process and show a legitimate basis for failing to renew.
So, the fact that you receive a term agreement in a renewal is no cause for panic or concern.
Having said that, however, if you are the recipient of a proposed term agreement, pay attention to its requirements. These agreements are done to identify certain standards or performance levels.
That in itself is not objectionable. What may be objectionable is if the manufacturer slips in language or provisions designed to prejudice the dealer's position in any future proceeding over a franchise termination or non-renewal.
Going along with the term agreement to end the constant franchisor pressure to sign is understandable. However, don't go along at all costs. Don't agree to goals or standards that are improper or that you can't meet, don't make admissions that you are in violation of the terms of your franchisor agreement and don't agree to provisions that might someday give the manufacturer grounds to terminate you.
Manufacturers regularly set goals and objectives for your dealership, and those may wind up in your term agreement. Sometimes they are fair and based on proper assumptions and methodology. Oftentimes, they are not. Don't agree to meet or exceed goals that you think are unfair and improper.
Don't agree to goals you cannot meet. Negotiate levels you can meet.
Agreeing that you will meet and maintain performance at the level set is a serious commitment. Even when you meet goals over several months, you may fail by dipping below the target in one month and wind up in breach.
Instead, agree to provide improvement plans for meeting goals and to use your best efforts to undertake those plans.
Manufacturers love establishing unrealistically brief time periods for compliance, especially where construction is involved. They fully understand zoning issues and bad weather can delay projects. Yet, they act as if no other dealer has ever experienced such problems and that they are your fault.
Make sure any agreed-upon timetable is realistic, and that you have a means of relief for delays beyond your control.
Often in term franchise agreements, manufacturers demand that dealers acknowledge they are in breach of franchise agreement obligations or deficient in performance (which can translate into a breach of the franchise agreement).
Those admissions can only come back to haunt you. Never admit that you are in breach of your franchise agreement or have “deficiencies” that can be considered a breach of your agreement. An never agree that your past performance is so deficient that the franchisor can meet the statutory test to terminate your franchise.
A franchisor may insert language saying the dealer agrees to a voluntarily franchise termination if performance standards aren't met. Never go along with that.
Michael Charapp is an attorney with Charapp & Weiss, LLP. He specializes in representing motor vehicle dealers and be reached at (703) 564-0220 or email@example.com.