Overreaching by a franchisor can have a price.  Haircutting franchisor Fantastic Sams learned this lesson the hard way last month.  Judge Clay Land of the United States District Court for the Middle District of Georgia entered summary judgment in favor of WJR clients Maxie Enterprises, Inc. and Paul Rubin and against Fantastic Sams with regard to Sams’ form of restrictive covenants in Georgia, finding the covenants unenforceable as a matter of law.   Fantastic Sams v. Maxie, et al., Case No. 3:11-CV-22, U.S.D.C., Middle District of Georgia, Docket No 34.  Sams had been warned at a prior hearing by Judge Land that he was inclined to grant summary judgment on counterclaims by Maxie and Rubin, striking down Sams’ covenants not to compete.   Sam’s now faces a situation where every single Georgia franchisee with similar contract language may now be able to leave the franchise system without fear of being ordered not to compete.

WJR’s clients “defranchised” a Sams unit in Watkinsville, Georgia and rebranded it as a local haircutting salon.   Sams filed suit to stop the operation of the independent salon, citing the Franchise Agreement’s covenant not to compete, and sought an interlocutory (interim) injunction while the lawsuit was pending.  Sams withdrew its request for a preliminary injunction after some strong words from Judge Land questioning Sams’ wisdom in pursuing it at the time.   Judge Land also suggested that Sams consider withdrawing the part of its case seeking a permanent injunction.   Sams doggedly pursued its injunctive claims nonetheless.

Judge Land held Sams covenants unenforceable because they were overbroad in that they kept Mr. Rubin from serving as owner, employee, etc. and “in any other capacity” in any business engaged in the sale or rental of products or services the same as or similar to those of the Fantastic Sams system, and because the covenant would have been effective for roughly nine years after the termination of the franchise in 2010.   The covenants were deemed far too broad and therefore unenforceable under Georgia law.

The lesson for franchisors and employers is don’t try to restrict too much.  Even with recent changes to Georgia law effective for contracts signed after May 11, 2011, it is safer to use a tailored approach when drafting restrictive covenants.   Choose a time period that is reasonable and fair and only restrict the franchisee or employee from doing things which require management or sales skills which he or she was using before leaving the system or your employ.   Consider using covenants not to solicit customers, which are narrower than broad covenants not to compete.   If you rely on a poorly drafted covenant, you risk having no protection at all.

The Eleventh Circuit Court of Appeals recently reversed an earlier Tax Court holding which had allowed a minister to exclude from income the rental allowance for not just one home, but two homes.  The taxpayer received a parsonage allowance for his primary residence . . . and his lake house. IRS Code section 107 allows for a parsonage allowance but didn’t clarify that a parsonage was a single home.  The Tax Court agreed with the taxpayer regarding the apparent lack of clarity in defining a “home”.  However, the Court of Appeals was less forgiving and overturned the Tax Court, eliminating the second exclusion.  Commissioner v. Driscoll, 109 AFTR 2d 2012-428.

Peco Foods attempted to change its accounting methods to take advantage of the accelerated depreciation.  Unfortunately for Peco Foods, neither the IRS nor the Tax Court agreed, determining that the written asset purchase agreement superseded an attempt to later implement the residual method of Code Section 338(b)(5).  Peco Foods Inc. et. al., TC Memo 2012-18.

Don’t overlook something as simple as purchase price allocation on the front end.  Make sure that you and your advisors fully understand the impact of the purchase price allocation before closing on the acquisition.

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I recently negotiated a commercial lease and encountered a situation you want to avoid. When you negotiate to have a personal guaranty of a lease terminated prior to the end of the lease term, you should make sure that such termination language is also included in the guaranty itself. If you do not do this, you may later confront a landlord who tells you that your guaranty is a separate and distinct obligation apart from the lease itself. In order to avoid this situation, make sure any lease language providing for the termination of the guaranty is also contained in the guaranty itself.

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I recently reviewed a commercial lease and encountered a situation you should avoid. Lease renewal options typically contain a precise rent amount the tenant will pay during the renewal term. Some leases, however, state the rent during the renewal term will be the market rate at that time. They may include a vague market rate definition that does not include a formula or other precise way to calculate such rent. If the tenant agrees to this the tenant runs the risk that the provision will be unenforceable because the definition of the term “market rate rent” can be uncertain. Commercial lease provisions are like the tentacles of an octopus each having the ability to reach in to and remove hard won profits from an unsuspecting tenant.

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The Fulton County tax assessor has been reassessing commercial property over the last few years. As a result tax assessments on many Fulton County commercial properties has increased substantially. Most leases pass this expense onto the tenant. If you are looking at new space you want to ask for the building’s operating expenses and pay close attention to whether the property has been reassessed yet or not. In negotiating the lease, this can be addressed by having the most recent year for operating expenses that includes the tax increase be used as the base year for determing expenses above the base year operating expenses that are passed onto the tenant. In other situations where taxes are part of CAM charges you want to negotiate for a cap on CAM charges if possible. In any event, if you know about the tax assessment issue you can plan alternative strategies to try and mitigate the cost of this increase.

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Pre printed form commercial sales agreements contain pitfalls for buyers unaware that the form is silent on many provisions that are critical to specific types of corporate and real estate transactions. I recently reviewed a form commercial sales agreement that addressed the sale of a business along with the commercial real estate. The form, however, was silent on critical issues such as non competes from the seller and its principal owner. The form also did not address escrowing a portion of the purchase price for use in the event the seller breached the contract. When confronted with pre printed form agreements, the buyer should not automatically assume this form is more efficient and costs less. It is typically more difficult and time consuming for an attorney to review a form prepared by someone else because he or she must figure out what has been left out or not addressed in the draft contract. As a result, the buyer should always insist whenever possible on drafting the sales documents and not rely on the use of the pre printed form or other seller or broker generated form agreement.

As always, your trusted legal resource for practical advice.