Franchisee 101: Pandemic No Excuse for Non-Payment

Lewitt Hackman

The Massachusetts Supreme Judicial Court granted summary judgment in favor of the seller of a janitorial service franchise based on claims by the buyers that the COVID-19 pandemic excused their obligation to pay the seller the remainder of the purchase price for the franchised business. The trial court previously granted summary judgment in favor of the seller and denied a motion for reconsideration. The buyers appealed and the state Supreme Court transferred the case from the Appellate Court.

The terms of the 2015 purchase agreement included a promissory note in favor of the seller for the reminder of the purchase price. The initial note required a balloon payment in 2018 with a clause that permitted a $15,000 credit against the note if the franchise sales fell below a certain amount for the first six months after the sale. The buyers requested an extension of the note in 2018 to make the final balloon payment in 2022. This amended note made the buyers jointly and severally liable and provided for several events of default that triggered accelerated payment and late fees. The buyers failed to make an installment payment in 2020 during the pandemic and the seller’s counsel sent a notice of breach and demanded accelerated payment. The seller then filed suit and moved for summary judgment based on the default of the amended note.

The buyers argued impracticability of performance and frustration of purpose due to the pandemic. The buyers claimed that the pandemic’s effect on their franchise business’ revenue prevented them from making the payment due under the note. Because the buyers were jointly and severally liable for the payments, the court found that the effect of the pandemic on their business did not address their personal obligation to pay the seller. The court recognized that the pandemic likely had a negative effect on both the business and personal financial condition of the buyers, but this added difficulty of performance on the note did not amount to impracticability.

Next the court held the record did not show that when the contract was entered into the non-occurrence of a pandemic was an essential assumption of the contract. The financial condition of the franchise business was only at a factor for the first six months post-sale when there was a credit available to the buyers. In contrast, after the amended note, the change in the financial condition of the business and buyers personally, among other events, could cause a default. There was also no force majeure clause in the amended note.

As to frustration of purpose, the court found there was no evidence that the purpose of the contract was for the buyers pay the amounts owed from the note solely from the revenue of the sold business. The only repayment condition tied to the business revenue expired after the first six months. The court was also reluctant to re-write the contract when there was no evidence of duress or predatory behavior by the seller.

Franchisees looking to buy or sell their franchises should seek the advice of franchise counsel to negotiate the deal terms. Although the pandemic was not foreseeable, including a force majeure clause to a promissory note that contains joint and several liability might have protected the buyers from defaulting on their note and triggering accelerated payments and late fees.

Le Fort Enterprises, Inc. v. Lantern 18, LLC, Mass. Sup. Ct. (Jan. 3, 2023)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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