Grass is greener on other side of the franchise

Many headlines have been generated by the unfortunate saga of the sale of non-existent Green Acres franchises by a master franchisee to up to 200 unsuspecting sub-franchisees.

One of the most tragic elements of this story is that the perpetrator of the scheme appears to have targeted immigrants with limited understanding of English who were driven by a desire to build a secure future in New Zealand based on their commitment to work hard.

Fortunately these incidents occur rarely within the New Zealand franchise sector and should not result in a knee-jerk reaction.

For many years there has been ongoing discussion regarding the desirability of introducing legislation to regulate the sector -- as is already the case in Australia.

However, no widespread agreement has been reached either on whether legislation is the answer or, if legislation was introduced, what form it should take.

Drawing on the Australian experience, it is my view that we should ensure that the introduction of any legislative code should follow thorough review of the landscape in other jurisdictions, analysis of the costs associated with compliance and the possible effects on the sector.

Anecdotally, it is said that growth in the Australian franchise sector was seriously impacted when the Australian Code was first introduced in 1998.

Legislation would not have prevented Green Acres fraud. Many New Zealand commentators are of the view that even if a code had already been introduced it would not have prevented the Green Acres fraud.

What should, however, have identified the fraudulent activities of the master franchisee would have been a thorough due diligence by specialist franchise advisers.

However, many people wanting to commence business are reluctant to spend money on financial and legal advisers.

All too often legal advisers only become involved when the relationship has soured.

The franchisor may have failed to provide the promised support, financial representations may have been incorrect, or the franchisee may be struggling with inadequate systems.

Early due diligence can save later costs.

It is important to be aware from the outset that the costs of extracting a franchisee from a non-performing franchise or to challenge a termination notice issued by the franchisor will inevitably be greater than that of reviewing a proposed franchise at the outset.

In a case such as Green Acres, ideally, the sub-franchisees' legal advisers would have sighted the master franchise agreement to ensure that the master franchisee had the rights to grant sub franchises as he represented.

If the franchisor was reluctant to disclose confidential aspects of the contract with the master franchisee, a letter confirming the terms of the franchise, the rights of renewal and that the master franchisee was not in breach would have sufficed to confirm the master franchisee's legal right to sell sub-franchises.

Pending the introduction of legislation, should that be considered necessary, the single most important action that could prevent similar incidents happening in the future is education.

People considering acquiring a franchise must be educated to ask questions and obtain proper advice.

An intensive due diligence process will highlight areas of weakness and will allow the prospective franchisee to make an informed decision whether to proceed with the acquisition of a particular franchise or to canvass other opportunities.

Claire Byrne is a commercial partner in the Wellington office of Gibson Sheat Lawyers.

She specialises in company and commercial law, commercial property leasing and development, employment and franchise law.

For further information contact at claire. byrne@gibsonsheat.com or telephone 04 9167483.