Has your dealership ever had the curse of the cat people put on it by your franchisor? You have if you have ever made this phone call to your lawyer or to VADA: “Help! The manufacturer has only given me a one year term franchise agreement. What have I done to deserve this? I can’t let them put me out of business in a year!” So, you may ask, 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.
Virginia law provides 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 DMV termination process and show that it has a legitimate basis for failing to renew. Therefore, 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 term agreement during renewal, you do have to pay attention and be careful about the requirements it contains. Term franchise agreements are done to identify certain standards or performance requirements for the dealer. That in itself is not objectionable. What may be objectionable, however, is if the manufacturer tries to slip in language or provisions designed to prejudice the dealer’s position in any future proceeding over the termination or the non-renewal of the dealer. Here are questions and answers about common provisions in term franchise agreements.
Why agree in the first place? Simply because your franchisor will wear you out if you don’t. A franchisor can put incredible pressure on a dealer to sign a term agreement after the previous franchise agreement’s expiration date. Its representatives will use a variety of tactics from gentle urging to outright threats. Throughout the process, keep in mind that you have a right to renewal under the Virginia franchise statute. A manufacturer cannot withhold that and say that it will only renew if you agree to radically restructure the deal with the franchisor. Going along with the term agreement to end the process 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.
Are the objectives that your dealership is supposed to reach appropriate? Manufacturers regularly set objectives for your dealership. Sometimes they are fair and based on proper assumptions and methodology. Often, they are not. For example, a common objective stated in a term agreements is reaching and maintaining a specified level of sales efficiency. However, are the sales efficiency targets valid? Or is the manufacturer’s measurement of sales efficiency improper because it is using the wrong primary market area for your dealership, or because it fails to take into account special circumstances that should lead to an adjustment of the sales objective, or for any of a variety of other reasons? Don’t agree to meet or exceed objectives that you think are unfair and improper.
Can you reach the objectives? Even if the measuring methods are appropriate, can you meet the levels of performance set? Or are they too lofty? Negotiate levels that you can meet.
Shouldn’t you simply agree that you will use best efforts to reach objectives? Actually agreeing that you will meet and maintain performance at the level set is a serious commitment. Even when you meet the required level over several months, you may fail by dipping below the target in one month and wind up in breach. Agreeing to provide improvement plans for meeting objectives and using your best efforts to undertake those plans is a better sales improvement provision.
Are timetables for compliance realistic? Manufacturers love establishing unrealistically brief time periods for compliance, especially where construction is involved. They fully understand the delays that can be caused by zoning and planning offices or bad weather, yet they act as if no other dealer in the country has ever experienced such a problem and that any delays are fully your fault. Your failure to meet a timetable gives the manufacturer great leverage, and that’s exactly the position in which it wants to find itself to bargain for more concessions from you. Make sure that any timetable to which you agree is realistic, and that you have a means of relief if there is a cause beyond your control that might prevent you from meeting your timetable.
Why acknowledge a breach? Often in term franchise agreements, manufacturers demand that dealers acknowledge that they are in breach of franchise agreement obligations or that they are deficient in performance (which can translate into a breach of the franchise agreement). Those admissions can only come back to haunt you. You can acknowledge that you have been told by the manufacturer that it claims to have standards you are not meeting, if that’s the case. But never admit that you are in breach of the agreement and never admit that you have “deficiencies” that can be considered a breach of your agreement.
Know the statutory magic language to justify termination and do not agree to it. Virginia law requires that a manufacturer must prove that it has “good cause” – the “magic language” — to terminate or fail to renew a dealer. Sometimes a franchisor will insert into a term agreement the dealer’s acknowledgment that it is so deficient that the “magic language” threshold is met. This will be used against the dealer in the event of a future attempt to terminate or not renew the dealership. Never agree that your prior performance or your failure to meet a future objective is “good cause” and justifies termination.