Transfer And Refund Rights
Did you know that 7-Eleven, Inc. (“SEI”) may terminate your Franchise Agreement if your lease ends, your store is taken by the government under the power of eminent domain, or certain other situations? If SEI decides to terminate your franchise agreement under one of these circumstances, what do you do? What are your rights under the Franchise Agreement?
Most franchisees do not experience this unfortunate event, but many have with disastrous consequences. It generally causes horrible problems for them. It is a good idea to be ready and to plan ahead for this unpleasant circumstance.
Paragraph 26 of the Franchise Agreement gives SEI the right to terminate your Franchise Agreement under the following circumstances: 1) the landlord for your store and SEI were unable to agree on terms for a new lease during the term of your Franchise Agreement and the lease has not been renewed, or the lease ended because the landlord refused to renew the lease to SEI in order to use the property for another purpose, or 2) your city, county, or state has decided to condemn the property where your store is located under the power of eminent domain, or 3) your store is badly damaged by some calamity and it cannot be repaired within 30 days, or 4) the store is permanently closed because the law requires it (so long as that closure is not caused by you).
Under the Franchise Agreement, the franchisee has two choices in the event of this kind of termination. Either the franchisee can elect to transfer to another store or to receive a refund of a portion of the franchise fee back from SEI.
Transfer To Another Store
While it sounds easy to transfer to another store, it seems to me the percentage of climbers who summit Mount Everest exceeds the percentage of willing 7-Eleven franchisees (whose Franchise Agreements have been terminated under Paragraph 26) actually transferring to another 7-Eleven store. SEI creates so many obstacles in order to obtain a transfer, it seldom actually happens.
First, the franchisee must elect to transfer within 180 days following the date of termination either by signing a current Franchise Agreement for the new store or completing a “Transfer Election Form.” This can be a problem. SEI will not give the transferring franchisee a Franchise Agreement for a new store unless a 7-Eleven store is available to be given to the franchisee. Also, there is no such form as a “Transfer Election Form.” I personally requested the “Transfer Election Form” from SEI representatives and was told the form “does not exist.” I do not know why SEI refers to this non-existent form in its many thousands of contracts with franchisees, and neither did the folks I spoke to in Dallas about this. If it actually exists, I hope someone will send one to me! Therefore, the franchisee should put in writing to SEI his or her election to transfer within 180 days from the date of termination or the franchisee will be considered to have elected the refund.
Second, there are numerous conditions to qualify for a store transfer. These are: 1) no transfers to a third party, 2) no existing Material Breach at time of election to transfer, 3) no net worth violations for a full year prior to date of election to transfer, 4) the franchisee must sign both a new, current Franchise Agreement with a term ending when the existing Franchise Agreement would have ended, and a mutual termination and release of all claims related to the old Franchise Agreement, 5) the franchisee must not have received four or more notices of Material Breach within two years before the election, 6) the franchisee must undergo all training required by SEI (at SEI’s expense), 7) SEI allows franchisees to transfer only to 7-Eleven stores “available for franchise,” 8) the transfer store must have been open as a 7-Eleven store for at least 12 months, and 9) the franchisee must meet SEI’s then-current qualifications for franchisees as determined in their sole discretion.
If franchisees qualify in all other respects, most (not all) franchisees in this situation are unable to transfer because SEI may not have any stores “available for transfer.” If this happens, SEI representatives routinely tell the franchisees who elect to transfer that it has no stores available for franchise, which prevents the franchisee from transferring. In some cases, SEI representatives have told the franchisee he or she must accept any franchise that may be available anywhere in the United States.
Naturally, when SEI charges franchise fees in the hundreds of thousands of dollars for sales of 7-Eleven store franchises, and SEI’s internal budget heavily relies upon receiving franchise fees from sales of 7-Eleven stores, it is easy to understand why it fails to make stores “available for franchise” to transferring franchisees. In my experience, SEI rarely makes stores available for transfers voluntarily and usually says “there are no available stores” to transferring franchisees. This is only anecdotal evidence based upon my personal experience, but I have seen it numerous times.
Clearly it is within SEI’s power to make stores available for franchise for these purposes if management chooses to do so, but the company routinely refuses to do so (it cannot collect franchise fees). We believe the covenant of good faith and fair dealing contained in every contract requires SEI to reasonably undertake to make stores available to franchisees who are forced to transfer due to matters beyond their control. SEI must not act unreasonably in choosing whether or not to make stores available to transferring franchisees. SEI may not use its power to unreasonably or unfairly harm the franchisee or to deprive the franchisee of the benefits of the Franchise Agreement. Stated simply, SEI must exercise its decisions about whether to make stores “available for transfer” or to sell such stores, in a fair and reasonable manner.
Unfortunately, even if there is a store available, SEI can say the franchisee does not meet the then-current qualifications determined in its sole discretion, and refuse the transfer. This must be challenged by franchisees as well. This discretion cannot be exercised unreasonably by SEI.
Electing The Refund
If the franchisee does not elect the transfer, he or she may be entitled to a refund. The refund is calculated by a formula based on a deduction and a percentage based upon the length of time remaining on the contract.
For the 2004 Franchise Agreement having a fifteen-year term, the formula is the franchise fee paid by the franchisee less $20,000, and the difference is divided by 180 months and then multiplying the result by the number of calendar months left in the Franchise Agreement. Unfortunately, SEI has taken the position it does not have to pay any refund of the franchise fee under Paragraph 26 to any terminated franchises who signed the 2004 agreement because no franchise fee was paid in 2004 by the franchisees for the extension beyond the original termination date of the prior Franchise Agreement.
For other Franchise Agreements having only a ten-year term, the formula is the same, except the number of months used is 120.
Finally, the refund does not provide any payment of good will to franchisees who lose their store, which is where most of the value is. Naturally, most franchisees prefer to transfer.
If your store Franchise Agreement is terminated for any of the reasons stated under Paragraph 26, you should hire a lawyer immediately to protect your rights. We strongly recommend you contact legal counsel if you wish to transfer to another store. Pushing back hard against SEI is the only way to enforce this valuable right.
SEI’s representatives may do everything in their power to frustrate your rights to a transfer and/or to a refund. It is essential to protect your rights or you may lose everything.