Within Item 17, the franchisor must disclose and summarize the legal rights and obligations related to the renewal, termination and transfer of the franchised business. This item must also include a summary as to how legal disputes must be resolved between the franchisor and franchisee.
As anyone in the process of buying or selling a franchise will tell you, understanding the legal provisions in a franchise agreement is essential for making informed business decisions.
For prospective franchisees, being aware of the rights and obligations imposed by legal agreements before buying a franchised business is critical. From contract renewals to terminations, transfers, and dispute resolutions, knowing how to handle common problems before they arise can make the process of becoming a franchisee less challenging. Luckily, franchisors can make sure franchisee candidates have a clear understanding of their contractual rights and duties by disclosing them accurately in Item 17 of the Franchise Disclosure Document (FDD).
In this article, we’ll discuss the information that must be disclosed in Item 17 to ensure prospective franchisees are aware of contractual provisions related to the renewal, termination and transfer of their franchised business, as well as the process for navigating legal disputes should they arise.
What Information Must Be Disclosed in Item 17?
According to the federal Franchise Rule, within Item 17 franchisors must disclose specific contractual terms in the franchise agreement related to the franchise relationship, including the renewal, termination and transfer of the franchised business as well as the process for legal dispute resolution. Each provision disclosed in Item 17 must be enumerated alphabetically in a prescribed manner and include a cross-reference identifying the provision’s location in the relevant agreement.
Item 17 Disclosures and Format
Like several other items within the FDD, Item 17 disclosures must be presented in tabular format as described in 16 CFR § 436.5(q). The title “THE FRANCHISE RELATIONSHIP” must appear above the table in bold, capitalized letters. Directly below the title, a prescribed statement must appear in boldface type stating: “This table lists certain important provisions of the franchise and related agreements. You should read these provisions in the agreements attached to this disclosure document.”
Although the Franchise Rule does not mandate specific column titles within the table in Item 17, it is standard practice to label the table’s three columns as follows:
Column 1: Provision.
Column 2: Section in franchise or other agreement.
Column 3: Summary.
In the first column of the Item 17 table, 24 specific disclosure topics must be addressed by the franchisor. Each topic must be alphabetically enumerated with letters ranging from “a” to “w.” These disclosure topics include, but are not limited to, length of the franchise term, renewal or extension of the term, termination by the franchisee, termination by the franchisor, “transfer” by franchisee defined, dispute resolution by arbitration or mediation and more.
In the second column of the table, the franchisor must provide a cross-reference to the specific section or location of the provision in the franchise agreement or other relevant agreement.
In the third column of the table, the franchisor must provide a brief description of each contractual provision disclosed within the table. If a specific topic is not applicable to the franchise, the franchisor must state, “Not applicable.”
In situations where the franchise agreement does not address one or more of the mandatory disclosure topics within the Item 17 table, but the franchisor voluntarily provides benefits or protections to franchisees as a matter of unilateral policy, the franchisor must include a footnote in Item 17 describing that policy and whether it is subject to change.
Because the definition of “renewal” sometimes differs between franchise systems, 16 CFR § 436.5(q)(3) requires that franchisors define what “renewal” means for their franchise system within the third “Summary” column of the Item 17 table under disclosure topic 17(c) (“Requirements for franchisee to renew or extend”). When applicable, this statement must also disclose whether franchisees may be asked to sign a contract containing terms and conditions that are materially different from their original contract upon renewal.
Accuracy is critical when drafting Item 17, particularly when it comes to cross-referencing specific contractual provisions with the appropriate legal agreements in the item’s legally-mandated disclosure table. By working with an experienced franchise attorney to draft the FDD, franchisors can ensure their Item 17 disclosures are compliant with federal franchise regulations.
To learn more about franchise renewals, terminations, transfers, dispute resolutions and how we can help develop, review or improve your Item 17 disclosures, call us at (800) 976-4904 or fill out our contact form.