Real Estate Franchises- Understanding the Risks
by Ron Jackson
Franchises Dominate the Real Estate Industry
These franchises have networks of independently owned and operated real estate agencies. Like other franchises, the franchisor licenses the use of its name to the franchisee in exchange for a fee. The fee is typically a percentage of the real estate sales of the franchisee. There often are additional fees paid by the franchisee for marketing done by the franchisor.
The legal document which controls this franchise relationship is the franchise agreement. Although franchise agreements are subject to regulation, such as the Washington Franchise Investment Protection Act, these agreements are typically drafted by the franchisor and often contain provisions which benefit the franchisor. Here are a few examples:
Many real estate franchise agreements do not provide an exclusive territory for the real estate agency franchisee. Without an exclusive territory, the franchisee is at the mercy of the franchisor regarding other real estate agencies the franchisor allows to operate in the franchisee’s market. Obviously, this presents a significant risk to the franchisee’s business. If the franchisor decides to allow other competing agencies to operate in the same local area, there may not be any way for the franchisee to prevent it other than filing a lawsuit. Whether a lawsuit would be successful depends on the particular circumstances and the terms of the franchise agreement.
Taking Agents from the Franchisee
There may not be any restriction on the real estate franchisor taking the franchisee’s agents and moving them to another agency, even to an agency in the same territory. This “raiding” of the franchisee’s real estate agents not only can be extremely damaging to the franchisee’s business, it sometimes is done as a deliberate strategy by the franchisor to weaken or punish the franchisee. A properly drafted franchise agreement may avoid this type of scenario.
Lack of Compensation Upon Termination
The franchise agreement often allows the franchisor to terminate the franchisee’s franchise at any time with only minimal notice to the franchisee. Although the franchise statute contains some provisions which may require the franchisor to reimburse a franchisee for “inventory,” this is not of much help to a real estate agency franchisee. A franchisee, at minimum, should ensure that the franchise agreement provides enough notice of termination to allow the franchisee to pursue other business arrangements.
We'll Get the Legal Answers You Need
These examples demonstrate the need for any potential real estate franchisee (or other franchisee) to consult with an attorney before entering into the franchise agreement. At Jackson Law, we tailor our high-quality legal representation to each of our client’s unique circumstances and needs. Call us today at 425.646.6315 or fill out our online contact form for a free legal consultation!