Most franchise agreements contain clauses dealing with the assignment by either party of their rights and obligations in terms of the agreement, to a third party. 

In the case of franchisees, the question of assignment usually arises when the franchisee wants to sell its business, so that the purchaser is substituted as the franchisee. The primary legislation that governs franchising and franchising agreements in South Africa, the Consumer Protection Act (CPA), and the regulations promulgated in terms of it, oblige the franchisor to spell out in the franchise agreement “the conditions under which the franchisee or his, her or its estate may transfer or assign the rights and obligations under the franchise”. In most cases, the franchise agreement provides that the franchisee may not cede any of its rights or delegate any of its obligations without the consent of the franchisor. This is understandable, as the franchisor must reserve the right to approve any potential franchisee, even one who is taking over the business of an existing franchisee.

The CPA and regulations do not mention nor impose any obligations in respect of assignments by the franchisor. In practice, most franchise agreements expressly allow the franchisor to assign its rights and obligations to any third party it chooses, at any time, whether or not the franchisee objects. The person to whom the franchisor assigns its rights and obligations will then automatically become the franchisor in terms of the agreement. However, certain provisions of the legislation, might have the effect that the franchisor may not simply assign its rights and obligations without taking its franchisees into account. 

The regulations contain a detailed list of terms and information that a franchise agreement must contain. This information includes – 

• the franchisor’s legal name, trading name, registered office, street, postal and e-mail addresses, telephone and fax numbers;
• the names, identity number, town of residence, job titles and qualifications of the franchisor’s directors or equivalent officers;
• unless the franchisor is a company listed on a stock exchange, details of any proprietor, member or shareholder different from the directors or equivalent officers whose information has been provided in respect of the previous point.

In addition, the regulations also require that, at least 14 days before a franchise agreement is signed, the franchisor must provide the franchisee with a disclosure document containing information about the franchisor’s business and financial position. It includes – 

• the number of outlets franchised by the franchisor;
• the growth of the franchisor’s turnover, net profit and the number of individual outlets franchised by the franchisor for the financial year prior to the date on which the prospective franchisee receives the disclosure document;
• a statement confirming that, since the date of the last certificate provided with the disclosure document (as mentioned below) there have been no significant or material changes in the franchisor’s financial position, and that the franchisor has reasonable grounds to believe that it will be able to pay its debts as and when they fall due;
• written projections in respect of levels of potential sales, income, gross or net profits or other financial projections for the franchised business or franchises of a similar nature, with particulars of the assumptions upon which these representations are made.

Also, in terms of the regulations, along with the disclosure document, the franchisor must provide -  

• a certificate on an official letterhead from a person eligible in law to be registered as the accounting officer of a close corporation, or the auditor of a company, as the case may be, certifying that—

1. the business of the franchisor is a going concern;
2. to the best of his or her knowledge the franchisor is able to meet its current and contingent liabilities;
3. the franchisor is capable of meeting all of its financial commitments in the ordinary course of business; 

• a certificate on an official letterhead from a person eligible in law to be registered as the accounting officer of a close corporation, or the auditor of a company, as the case may be, certifying that—

1. the business of the franchisor is a going concern;
2. to the best of his or her knowledge the franchisor is able to meet its current and contingent liabilities;
3. the franchisor is capable of meeting all of its financial commitments in the ordinary course of business as they fall due; and
4. the franchisor’s audited annual financial statements for the most recently expired financial year have been drawn up—

1. in accordance with South African generally accepted accounting standards;
2. except to the extent stated, on the basis of accounting policies consistent with prior years;
3. in accordance with the provisions of the Companies Act and all other applicable laws; and
4. fairly reflecting the financial position, affairs, operations and results of the franchisor as at that date and for the period to which they relate; and.

• an organogram depicting the support system in place for franchisees.

These requirements were deliberately imposed to address an issue that was common in the franchising world, and not only in South Africa – when signing franchise agreements, franchisees often did not have access to sufficient information regarding the franchisor, its management, trading record and financial strength to make an informed decision as to the soundness of the business in which they were investing. The CPA and regulations sought to remedy that problem by requiring franchisors to provide this important information to every franchisee before an agreement is signed, so the franchisee can assess the prospects of the business before investing a large sum of money in it.

Against the background of the CPA and regulations, an assignment of a franchise agreement raises a problem – having assessed and committed itself to the agreement on the basis of disclosures made by the original franchisor, the franchisee now finds itself dealing with a different franchisor to whom some, if not all, of the information disclosed by the original franchisor may not apply. If the franchisee discovers that to be so, it might well be justified in arguing that it ought not to be held to be bound to the new franchisor in terms of the agreement, notwithstanding that the agreement allowed the original franchisor to assign its rights and obligations.

To address this concern, it is suggested that even when a franchise agreement allows the franchisor to assign it, measures should be put in place to ensure that franchisees are not prejudiced by the assignment and they are assured that the new franchisor can and will provide all the support and services undertaken by the original franchisor. These may include – 

• the original franchisor guaranteeing the new franchisor’s performance of its obligations in terms of the agreement;
• providing the franchisee with a disclosure document relating to the new franchisor; and/or
• having the franchisee sign an addendum to the franchise agreement, containing the information in respect of the new franchisor that was provided in relation to the original franchisor when the agreement was signed.

By putting these measures in place, the franchisor can ensure that the franchisee remains fully informed of all the relevant facts in regard to the new franchisor and the franchised business and will not be able to argue that material information was withheld from it.