Understanding the security provisions in a franchise agreement is essential for any prospective franchisee. These provisions often place significant obligations on franchisees and their guarantors, so it’s vital to know what you’re agreeing to before signing on the dotted line. Below, we explore the most common security provisions and what to look for to protect your interests.
Personal Guarantees
A personal guarantee is a promise by an individual to be personally responsible for the obligations of the franchisee. In other words, if the franchise business fails or breaches the agreement, the franchisor can seek repayment or damages from the individual guarantor’s personal assets. This is a common feature in most franchise agreements, and it extends the liability beyond the business entity to the franchisee personally.
When reviewing a franchise agreement, it’s important to understand exactly who is required to provide a guarantee. Many agreements only require the franchisee or business owner to sign a personal guarantee, but some go even further. Some franchisors require guarantees from a spouse or other close family members. This can put more of your family’s personal assets, like your home, at risk if the business encounters financial difficulty. Always review your franchise agreement carefully and understand the full scope of who is being asked to guarantee the business obligations.
A franchise lawyer can help you determine if these requirements are reasonable and whether there is room to negotiate, especially if your spouse or others are being asked to guarantee the franchise.
What the Guarantee Applies To
Personal guarantees often come with broad indemnities, meaning the guarantor may be responsible for a wide range of losses, costs, or liabilities that arise in the context of the franchise business. These can cover legal fees, damages, or penalties, even if they result from factors beyond your direct control. For this reason, it’s essential to closely review your franchise agreement and the guarantee provisions. We dove into indemnities in franchise agreements in our article here.
When reviewing these provisions, make sure to look for appropriate carve-outs. Carve-outs protect you from being liable for losses caused by the franchisor’s negligence or actions. Without these carve-outs, the guarantee could hold you responsible for everything, even if it’s not your fault. A franchise lawyer can help you negotiate these provisions to ensure they are fair and balanced, reducing your exposure to unnecessary risk.
PPSR Clauses
PPSR stands for the Personal Property Securities Register. It is a national online system where security interests in personal property are registered. In many franchise agreements, franchisors include clauses allowing them to register a security interest against the franchisee’s personal assets. This means if you default on the franchise agreement, the franchisor has a legal claim over those assets.
The scope of these security interests can vary. Some franchise agreements limit the security interest to assets used in the franchised business, like equipment or the fit-out of the premises. Others are much broader and cover all the personal assets of the franchisee or guarantor, even those unrelated to the franchise.
When reviewing your franchise agreement, it’s important to understand exactly what assets the PPSR clause covers. Does it include all your personal assets, or is it limited to those used in the business? A franchise lawyer can help you assess the scope of these clauses and ensure they are reasonable, protecting your personal property from undue risk.
Real Property Clauses
Some franchise agreements go even further. They grant the franchisor the right to lodge a caveat or register a mortgage over any real property owned by the franchisee or guarantor. Here, a caveat prevents you from selling or transferring ownership of the property without the franchisor’s consent. A mortgage gives the franchisor even greater control and security over your real estate.
If your franchise agreement includes real property security provisions, it’s crucial to fully understand the implications. These clauses give the franchisor significant leverage. They may put your home or investment property at risk if the business faces financial difficulties. Accordingly, you should review your franchise agreement carefully with a franchise lawyer. This helps you understand whether these provisions are necessary and if they can be negotiated for better protection of your personal assets.
Why Legal Advice is Important
Security provisions in franchise agreements can have far-reaching consequences. They often involve personal guarantees, security over personal property, and even real estate. The financial exposure can be significant, making it crucial to get proper legal advice. A franchise lawyer can help you review your franchise agreement, explain the risks, and help you negotiate terms to better protect your interests. By understanding the security provisions upfront, you can make informed decisions and avoid unexpected financial liabilities down the track.
Conclusion
Security provisions in franchise agreements are essential to understand before you sign. Personal guarantees, PPSR clauses, and real property provisions can expose your personal assets to risk. Prospective franchisees should review their franchise agreement carefully and seek advice from a franchise lawyer. This will help you negotiate fairer terms and protect yourself from unnecessary financial exposure. They will also ensure you’re fully aware of your obligations and the risks involved.