Many hotel franchisees have approached me to discuss "getting out" of their hotel franchises by utilizing their "additional termination rights" offered to them under the terms of their franchise agreements. These additional termination rights are typically referred to as "exit windows." The purpose of an exit window in a hotel franchise agreement is to essentially permit a franchisee to exit the franchise system for any reason at specified times during the term of the franchise agreement ? ordinarily at the fifth or tenth anniversaries of the Opening Date of the hotel. These clauses can be extremely attractive to wary hotel franchisees who desire to have an "out" before the expiration of the franchise term if the hotel turns out to be an unprofitable venture.
The most unique thing about these windows is that they are rarely "open" when a franchisee decides to exercise his or her rights under the franchise agreement and exit the franchise system. As with most clauses in hotel franchise agreements, the exit window is heavy-laden with preconditions and triggering effects that must occur before the franchisee can exit the system. In that regard, the exit window is not the safe, viable exit-option that hotel franchise salesmen often boast of and promote during the sale of the franchise.
In many instances, these clauses require that you never receive a single notice of default from the franchisor or you risk losing your exit window rights without notice or opportunity to cure. Likewise, the agreement often requires that you achieve very high quality assurance scores after opening or your window rights will similarly disappear without notice. In essence, in most hotel franchise agreements, the franchisor reserves to itself the right to board over your exit windows so that they never see the light of day.During the term of a fifteen or twenty year hotel franchise agreement, it can be very important that you have the option to exit the franchise system without penalty if the hotel is, for whatever reason, underperforming. On more than one occasion, I have had clients who have attempted to exercise their exit window rights only to find that their windows had miraculously vanished years before due to a minor default alleged by the franchisor. At that point, as a franchisee, you have the option to de-identify your hotel and face a lawsuit from the franchisor for gargantuan penalty damages, or remain in the system and operate your hotel at an unprofitable level.
Essentially, you're damned if you do and damned if you don't.When purchasing a hotel franchise, be cautious about believing your hotel salesman that you can "get out" anytime. To be certain, after the franchisor and its attorneys are finished drafting the contractual language attached to your exit window, you may just find that your window is nothing more than an illusion that can vanish at a moments notice.Finally, before signing on the dotted line, take the time to thoroughly review each term of your franchise agreement, including any exit window provisions, and consult with an experienced franchise attorney to fully comprehend and understand the potential pitfalls associated with each term. In the long run, this small investment of time and money will inevitably better prepare you for the future of your franchise and hopefully help you avoid surprises like vanishing windows..
Bradley J. Hansen, Esq., is an attorney in the Northern Virginia law firm of Hughes & Associates, P.L.
L.C. Mr. Hansen's practice focuses on franchise, construction and complex civil litigation. Brad can be reached at brad@hughesnassociates.
com or by calling him at 703-671-8200.This article is not intended to provide legal advice, but to raise issues bearing on legal matters.
By: Bradley Hansen