Legal Update - Franchising
When can a franchisor refuse to consent to transfer of a franchise?
Wednesday 1 April 2009
The Franchising Code of Conduct provides that a franchisor must not unreasonably withhold consent to the transfer of a franchise. It sets out a non-exhaustive list of circumstances in which franchisor’s can reasonably withhold their consent to a transfer. Lockhart v Holden is a recent case of the Queensland Supreme Court (the Court) which looked at when it is reasonable for a franchisor to refuse consent to a transfer.Background
In 1989 Lockhart began operating a Holden motor vehicle dealership franchise at Southport on the Gold Coast. In 2003, Lockhart entered into heads of agreement with Zupps (a multi-unit and multi-brand motor vehicle dealership franchisee). That agreement provided that Zupps would buy Lockhart’s franchise and lease premises from which the franchise was conducted. Lockhart requested the franchisor’s consent to transfer its franchise to Zupps. The franchisor refused, claiming that the proposed transfer would have an adverse affect on the franchise system. The franchisor gave the following reasons:
- the proposed transfer will increase the franchisor’s risk exposure by concentrating a large portion of its business and distribution in the hands of one franchisee, Zupps
- it may adversely impact on the ability of other franchisees in the region to access markets and the supply of products
- the future business model of Zupps had additional risks within the ownership and management structure that are considered to have the potential to increase the franchisor’s risk within its distribution network.
The franchisor argued that its refusal to consent was legitimate and aligned with its immediate and long term business interests and strategies. The evidence showed that the franchisor’s “Chain Dealer Policy” substantially influenced its decision to refuse consent. Alternatively, Lockhart contended that the franchisor can only withhold consent if it reasonably doubts the potential buyer’s ability to comply with the franchise agreement. Ultimately the Court held that the reasons why the franchisor refused consent were reasonable.
Findings
The case had two major findings.
- The onus is on the franchisee to prove that the refusal by the franchisor to give consent to the transfer was unreasonable. This is a significant finding because it implies that without proof of an unreasonable refusal; it is automatically assumed to be reasonable.
- The Court affirmed the decision of Masterclass Enterprises v Bedshed Franchisors (which was discussed in our October 2008 newsletter). In Masterclass the court held that the list of circumstances set out in the Franchising Code of Conduct for which consent may be reasonably withheld is not exhaustive.
In Lockhart the Court considered a number of factors that provided legitimate reasons to refuse consent, such as:
- the transfer would result in unacceptable market concentration
- the transfers would result in an adverse effect on other franchisees (ie there was a real risk of a larger dealership dominating other dealerships through the sheer power of its size and stronger economic position)
- whether the purchaser has a definite succession plan (the managers of the purchaser had no equity in the business and little incentive to stay and no trained successors)
- whether a proper, post-transfer business plan has been devised.
The Court was satisfied that the reasons advanced by the franchisor were reasonable, genuine and in good faith. Consequently, the franchisee failed to prove that the franchisor unreasonably withheld its consent to the transfer.
What this means for franchisors
When considering withholding consent to the transfer of a franchise, the court will assess the franchisor’s reasons for withholding consent and whether those reasons reflect established policies and selection criteria. Provided that the franchisor has genuine reasons for withholding its consent to the transfer and has made the decision to withhold that consent in good faith, the franchisor is unlikely to be found to have “unreasonably withheld its consent” to a transfer. The ability of a potential buyer to comply with the franchise agreement is only one of the many factors that the court will consider.
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