Legal Considerations for Homebuilder Franchises

Bilzin Sumberg

When you think of a “franchise” you probably think of fast food restaurants, car dealerships and gas stations; not homebuilders. Nevertheless, homebuilder franchises are becoming more and more popular. For example, G.J. Gardner Homes, established in 1983 on the Sunshine Coast, now has a presence across eight states throughout the continental U.S. and has built more than 20,000 homes. Arthur Rutenberg Homes and Epcon are franchises which are also seeing an increase in business.

arrow homesHistorically, homes were built by either large national homebuilders or small local builders. However, with the overlay of the classic franchise formula onto a traditional homebuilder model, this third category of homebuilders has emerged. The benefits of a homebuilder franchise are not much different than the benefits of a McDonalds’ franchise. You obtain the same type of franchising benefits, centralized marketing and advertising, brand power, established systems, procedures and training, and franchisor support. Similarly to how a McDonalds’ franchisee “buys” a territory, a homebuilder franchisee typically “buys” the territory rights to a piece of a state or a city. As an added benefit, a homebuilder franchisee may get home plans that can be tailored to each buyer by a franchisor architect.

But as with all franchise relationships, there are a number of legal issues that homebuilder franchises must consider. One important issue is the franchise agreement, which sets forth the terms of the relationship between the franchisor and franchisee. The agreement will likely delineate, among other things, the length of the relationship, the relevant territory, required payments, trademark license and rights, termination rights, and the parties’ respective obligations, including the type of support the franchisor will provide. The agreement may also include choice-of-law and/or forum selection clauses, mandating that a certain state’s law will govern the agreement and/or that the dispute must be resolved in a certain forum.

All of these provisions are breeding grounds for legal disputes. Therefore, it is important to carefully negotiate them and understand the relevant rights and obligations. In addition, it is important to consider whether the state in which the franchise will be operating has applicable franchise laws. For example, a franchise agreement may state that the parties are permitted to terminate the agreement by notice and without cause. Nevertheless, a state’s franchise laws may only permit termination for cause.
So while there are many opportunities as franchise relationships expand into the homebuilder industry, all parties should be cognizant of the potential legal issues that may arise.

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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Bilzin Sumberg

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