Always and Fornever… Are Franchises in NJ Still Perpetual?
By: Lane Fisher and Frank Reino, Fisher Zucker
For 40 years we have explained to franchisors that franchises granted in New Jersey are considered perpetual because a franchisor must show “good cause” to fail to renew even without any renewal rights. This advice stems from a 1985 NJ Supreme Court decision in a Dunkin’ case stating that under the New Jersey Franchise Practices Act (“NJFPA”), once a franchise relationship begins, if the franchisee substantially complies with the terms of the franchise agreement, the deal cannot be terminated or not renewed except for good cause, even in the absence of any renewal provisions.
Well in September, a New Jersey federal court dismissed a hotel franchisee’s failure to renew claim under the NJFPA under some very unusual facts.
In Scion Hotels LLC v Holiday Hospitality Franchising LLC (“Holiday Inn”), the New Jersey federal court dismissed a franchisee’s claim for failure to renew. The franchisor argued that: (1) the NJFPA does not require a franchisor to offer renewal where a franchise agreement expressly states that it is non-renewable; (2) no court has ruled that a franchise agreement that contains express non-renewable language must nevertheless be renewed; (iii) judicial dicta requiring good cause for nonrenewal of a franchise agreement is not controlling or persuasive; and (iv) the plaintiff had no ability to enter into a renewal agreement with the franchisor because it signed a new franchise agreement with a competitor hotel brand. The court granted summary judgment in favor of Holiday Inn holding that Holiday Inn had good cause to not renew because the franchisee was not in substantial compliance with the franchise agreement because it failed to comply with the franchise agreement and voluntarily abandoned the franchise relationship by actively pursuing a rival franchise relationship.
In 2019, the franchisee expressed interest in purchasing a franchised holiday Inn hotel near Newark Liberty airport. The Franchise Agreement had 22 months left on its term and the franchisee expressly assumed the 22-month remaining term under an endorsement that said, “License is not renewable, and Licensee acknowledges and agrees that this License confers no…renewal rights following the expiration…” and further detailed its intent to have an additional hotel brand in the Newark Airport. The parties engaged in extensive back and forth about the degree of remodeling required to obtain a longer-term renewal and potentially change brands (to a Holiday Inn Express).
During this time, the franchisee also started to negotiate with a rival brand to convert the hotel and eventually executed a franchise agreement with the competitor, which Holiday Inn contended prevented the franchisee from renewal at that point.
The court discussed the other arguments raised by Holiday Inn but held the franchisor still must show good for the failure to renew the Franchise Agreement. Therefore, it appears that renewal is still perpetual unless the franchisor can show the franchisee is not in substantial compliance with the terms of the Franchise Agreement.
As written the NJFPA requires good cause for failing to renew so in a typical franchise expiration case, I expect courts will continue enforce a franchisee’s renewal request in the absence of the franchisor establishing good cause to not renew.
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