Franchisor 101: The Proof Is in the Writing

Lewitt HackmanTen years after the franchisor of the EXIT real estate system entered into a franchise agreement for a franchisee to operate an EXIT franchise in Maitland, Florida, the parties entered into another franchise agreement for a second EXIT location in Orlando, Florida.

Shortly after, and unknown to the franchisor, the franchisee assigned the Orlando agreement to a former Maitland manager, and was in negotiations with a competing real estate company to sell the Maitland and Orlando assets. The franchisee made repeated oral assurances to the franchisor over several months of his intent to renew the franchise agreement for a five-year term. Believing the franchisee intended to remain in the EXIT system, the franchisor allowed the franchisee to continue operating after the franchise agreement expired. Meanwhile, the franchisee tried to prolong the renewal process with false negotiation requests until the transactions for Maitland and Orlando closed.

After the franchisee sold the assets for both the Maitland and Orlando businesses, the franchisor filed suit alleging breach of contract, fraudulent misrepresentation, promissory estoppel and unjust enrichment. The trial court awarded partial judgment in favor of the franchisor for over $748,000 in damages, finding the franchisee’s representations were fraudulent promises to enter into the five-year renewal, made with a specific intent not to perform the promises at the time they were made. A Florida appellate court reversed, finding the fraud and estoppel claims arose from an unenforceable oral agreement to renew the franchise agreement, which violated the Florida statute of frauds requiring such agreements to be in writing. Stamer v. Free Fly, Inc., 2019 WL 2650238 (Fla. Dist. Ct. App. June 28, 2019).
In the appeal, the franchisee argued that the trial court erred in finding in the franchisor’s favor because the claimed oral agreement was not intended to be performed within one year, and was therefore required to be in writing under Florida’s statute of frauds. The court agreed, finding that the characterization of the oral agreement as one to simply renew the Maitland franchise agreement did not remove the agreement from the scope of the statute of frauds. Under Florida law, a party cannot avoid the writing requirement of the statute of frauds by recasting what amounts to a breach of an oral contract into a fraud claim.
It is important for franchisors to document all agreements with franchisees. As this case demonstrates, oral agreements to renew a franchise may not be sufficient to protect a franchisor’s rights, especially when dealing with holdover franchisees.

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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