Lons and Notices of Material Breaches: What You Should Do if One is Served

By Arnold J. Hauptman, Esq., General Counsel, UFOLINY

Maybe it just seems that way, but it appears to me from phone calls received from franchisees, that 7-Eleven local management is issuing more LONs and Notices of Material Breach than in the past. Moreover, many (but not all) of these Notices involve petty deviations from the Store Agreement, requiring franchisees to do certain things that would never be even considered as necessary—or even wise—in a private c-store.

That is disappointing because in these times of extreme difficulty with staffing and generally operating your stores, one would think that SEI would concentrate more on assisting its franchisees to make a decent living rather than threatening them with potential termination with often minor violations. Sometimes, circumstances such as the current COVID-19 crisis require a more compassionate and realistic approach to the interpretation and enforcement of SEI policy and the agreement. It is unfortunate, in my view, that SEI continues to almost harass franchisees with minor issues that just defy common sense.

It is never a good idea, in most cases, to simply accept these Notices without challenging them if you believe them to be unjustified. Here’s why: an LON is a Letter of Notification and is nothing more than a warning regarding specific issues in your store that your market manager or field consultant believes are not in compliance with the Store Agreement. It presents the franchisee with the opportunity to remedy the condition before it ripens into a full-blown material breach. These notices can contain a myriad of perceived offenses. In New York, at least, the LON du jour advises the franchisee that there are not enough write-offs for pizza and therefore it indicates that the franchisee is not making enough pizza to be thrown away. While pizza is a proprietary item for which you must maintain at all times a reasonable and representative quantity, does it make any sense to have pizza available at times when there are no customers to buy it?

It is important to note that there is absolutely no mention in the Store Agreement regarding an LON, and it is therefore of no contractual significance, as opposed to a Notice of one or more material breaches, which can be very significant.

A Notice of a Material Breach can have very serious consequences because it can lead to the termination of your franchise if the condition(s) complained of are not timely cured. While you may not view a specific problem as being “material,” 7-Eleven solely d e t e r m i n e s what is material and what is not. There is no negotiation as to what the word “material” means because paragraph 26 of the Store Agreement, which contains a complete list of all possible material breaches, begins with the franchisee acknowledging that all the listed breaches are material and that these “Material Breaches constitute good cause for termination.” In fact, there are some breaches (for example, understate or fail to accurately report store sales, violate wage and hour laws or immigration matters, conviction of a felony), which are non-curable and can result in the termination of all of a multiple franchisee’s stores.

Every franchisee should familiarize himself/herself with the material breaches of most concern. There are 12 non-curable breach categories and 16 categories of curable breaches which have cure periods after delivery of a written notice. These range from two days (failure to operate the store on a 24 hour basis), to three days (the most common being falling below minimum net worth, failure to make deposits, non-compliance with 7-Eleven Foodservice Standards), to five days (failure to maintain insurance, failure to certify and/or E-Verify employee eligibility, violate wage and hour laws), to 15 days (failure to participate in a customer loyalty program, violate any law, ordinance or regulation relating to the store’s operation), to 30 days (failure to obtain or maintain all required licenses and permits, failure to comply with any other obligation in the Store Agreement or in the Master Lease).

Keep in mind that the above breaches are only examples of the more common violations that, in my experience, SEI uses as a basis for issuing a Notice of a Material Breach, but there are many others that you should be aware of. Again, check out paragraph 26 of the Agreement. Also, it is important to note that whether or not an LON or Notice of a Material Breach sets forth valid reasons for its issuance is often not a black or white issue, but can be rather subjective and subject to interpretation of the contractual language or based upon your market manager’s opinion, and not fact.

Here is why you should always challenge, in writing, an LON, but most certainly a Notice of a Material Breach whether or not you have successfully cured it, if you believe it was invalidly or unfairly issued to you. The Agreement provides that a fourth material breach within a 24-month period can be non-curable. That is not to say that SEI will, in every case, terminate a franchise upon a fourth violation. I have seen that provision waived on occasion, but it depends on the severity of the prior breaches and whether or not the franchisee, in good faith, is attempting to cure the violation. However, if for any reason 7-Eleven has placed a target on your back, this provision can provide it with the ammunition to get rid of a franchisee it no longer wants in the system.

If you are served with a termination notice based on the fourth breach in 24 months and you wish to fight it in court, not challenging a prior notice is tantamount to an admission that it was validly issued. If you did send a written letter to your market manager stating the reasons why you believe the Notice was not validly issued, then you can argue in court that one or more of the Notices was improper and should not count as a breach and that you previously notified SEI of your position. It is not necessary that your written letter be poetic. It just needs to set forth the reasons why you believe it should not have been issued in straight forward language. Of course, if you agree that you did, in fact, breach the Agreement, then you should take it as a warning not to repeat the violation.

It appears to me from many years of dealing with Notices of a Material Breach that SEI has a policy of never withdrawing a Notice, but your written challenge will be placed in your file. Certainly, you should retain a copy of your challenge, preferably with proof of delivery to your market manager, and email can easily provide that proof.

TAKE NOTE: Many of you have stores in states that have franchise pro-tection laws that can supersede any one or more of the breach provisions in the Store Agreement.
Each of those states has varying protec-tions, but often do lengthen the period of times to cure, permit repeated breaches to sometimes be cured, or even prohibit termination or non-renewal for non-substantial violations of a franchise agreement. These are the states that have franchise protection laws that I am aware of: Arkansas, California, Delaware, Hawaii, Illinois, Indiana, Iowa, Michigan, Minnesota, Missis-sippi, Missouri, Nebraska, New Jersey, Washington Wisconsin, Washington, D.C., South Dakota, and Virginia. Try calling your local legislator for a copy of the protection laws in your state.

Let’s hope 2021 will be a lot better than 2020. It can’t be any worse.