The original documents were scanned as an image. The original file can be downloaded at the link above.
Sample Franchise Agreement
SFO FRANCHISE DEVELOPMENT LTD. FRANCHISE AGREEMENT
THIS FRANCHISE AGREEMENT (the "Agreement') is made and entered into by and between SFO Franchise Development Ltd., an Ohio limited liability company, having its principal place of business at 9150 South Hills Blvd., Suite 225, Cleveland, Ohio 44147 ("Franchisor"); and
_______________________________, an _______________________________, having its principal
place of business at ____________________________________________ ("Franchisee"); and
________________________________ . an______________________________________, having its
principal place of business at _________________________________________ ( "Controlling
Principal", or collectively, "Controlling Principals); on the date this Agreement is executed by Franchisor below (the "Effective Date").
WHEREAS, as the result of the expenditure of time, skill, effort and money, Franchisor has developed and owns a unique and distinctive system (hereinafter "System") relating to the establishment and operation of restaurants which utilize the themes and attractions of San Francisco, specializing in the sale of brick oven pizza, soups, salads and sandwiches prepared in accordance with Franchisor's recipes and specifications (hereinafter, "Restaurant(s)" or "Franchised Business(es)");
WHEREAS, the distinguishing characteristics of the System include, without limitation, distinctive exterior and interior design, decor, color scheme, and furnishings; proprietary products and ingredients; proprietary recipes and special menu items, uniform standards, specifications, and procedures for operations; quality and uniformity of products and services offered; procedures for inventory, management and financial control; training and assistance; and advertising and promotional programs; all of which may be changed, improved, and further developed by Franchisor from time to time;
WHEREAS, Franchisor identifies the System by means of certain trade names, service marks, trademarks, logos, emblems and indicia of origin, including, but not limited to, the marks "San Francisco Oven," "San Francisco Oven, Brick Oven Pizza, Soup, Salad & Sandwiches, a Taste of the Bay Area," and such other trade names, service marks, and trademarks as are now designated (and may hereafter be designated by Franchisor in writing) for use in connection with the System (hereinafter referred to as "Marks"), which Marks are licensed to Franchisor under a perpetual license agreement;
WHEREAS, Franchisor continues to develop, use and control the use of the Marks in order to identify for the public, the source of services and products marketed thereunder and under the System, and to represent the System's high standards of quality, appearance and service;
WHEREAS, Franchisee understands and acknowledges the importance of Franchisor's high standards of quality, cleanliness, appearance and service and the necessity of operating the business franchised hereunder in conformity with Franchisor's standards and specifications;
WHEREAS, Franchisee desires to use the System in connection with the operation of a San Francisco Oven restaurant at the location specified in Attachment A hereto, as well as to receive the training and other assistance provided by Franchisor in connection therewith; and
WHEREAS, this Agreement is entered into pursuant to a Development Agreement (the "Development Agreement") between Franchisor and__________________dated_____________.
NOW, THEREFORE, the parties, in consideration of the mutual undertakings and commitments set forth herein, the receipt and sufficiency of which are hereby acknowledged, agree as follows:
I. DEFINITIONS. For purposes of this Agreement, unless the context clearly indicates otherwise, the following terms shall have the following meanings. Other terms not specifically set forth below are defined within the text of this Agreement and shall have the meanings respectively ascribed to them.
A. Affiliate. With respect to either the Franchisee or the Franchisor, the term "Affiliate" shall mean any entity that is controlled by, controlling or under common control with such party.
B. Competitive Business. A "Competitive Business" shall mean a restaurant or deli business in which the sale of pizza for on premise consumption constitutes more than thirty (30) percent of the gross revenues of the business, excluding the sale of beverages.
C. Controlling Interest. "Controlling Interest" in Franchisee shall mean:
1. If Franchisee is a corporation, that the Controlling Principal(s), either individually or cumulatively, (i) directly or indirectly own at least fifty-one percent (51%) of the shares of each class of Franchisee's issued and outstanding capital voting stock and (ii) are entitled, under its governing documents and under any agreements among the shareholders, to cast a sufficient number of votes to require such corporation to take or omit to take any action which such corporation is required to take or omit to take under this Agreement; or
2. If Franchisee is a limited liability company, that the Controlling Principal(s), either individually or cumulatively, (i) directly or indirectly own at least fifty-one percent (51%) of all of Franchisee's ownership interests, and (ii) are entitled, under its Operating Agreement, similar governing documents, and any agreements among the members, to cast a sufficient number of votes to require such limited liability company to take or omit to take any action which such limited liability company is required to take or omit to take under this Agreement; or
3. If Franchisee is a partnership, that the Controlling Principal(s), either individually or cumulatively (i) own at least a fifty-one percent (51%) interest in the operating profits and operating losses of the partnership as well as at least a fifty-one percent (51%) ownership interest in the partnership (and at least a fifty-one percent (51%) interest in the shares of each class of capital stock of any corporate general partner) and (ii) are entitled under its partnership agreement or applicable law to act on behalf of the partnership without the approval or consent of any other partner or be able to cast a sufficient number of votes to require the partnership to take or omit to take any action which the partnership is required to take or omit to take under this Agreement.
D. Force Majeure Event. A "Force Majeure Event" shall include acts of God, strikes, lockouts or other industrial disturbances, war, acts of terrorism, riot, epidemic, fire or other catastrophe or other forces beyond Franchisee's control.
E. Franchisee's Principals. The term "Franchisee's Principals" shall include, collectively and individually, Franchisee's spouse, if Franchisee is an individual, all officers and directors of Franchisee (including the officers and directors of any entity which is a general partner of Franchisee) and all holders of an ownership interest in Franchisee and of any entity directly or indirectly controlling Franchisee, and any other person or entity controlling, controlled by or under common control with Franchisee. The initial Franchisee's Principals shall be those persons and entities listed on Attachment C.
F. Indemnifiable losses and expenses. The phrase "indemnifiable losses and expenses shall include, without limitation, all losses, compensatory, exemplary or punitive damages, fines, charges, costs, reasonable expenses and legal fees, court costs, settlement amounts, judgments, and other such amounts directly incurred in connection with matters described herein and payable to third parties.
G. Licensed Location. The term "Licensed Location" means the premises at the specific street address of the Restaurant location to which the rights granted by this Franchise Agreement shall apply as set forth in Attachment A.
H. Manuals. The term "Manuals" shall mean, collectively, Franchisor's written Manuals pertaining to the operation of all Restaurants including, without limitation, operations, administration, marketing, advertising, store development, and customer service; and other written directives which Franchisor may issue pertaining to all Restaurants from time to time whether or not such directives are included in the Manuals, and any other Manuals and materials created or approved for use throughout the System.
I. Operating Principal. Franchisee's "Operating Principal" shall be a Controlling Principal designated and retained by Franchisee who shall supervise and conduct the business contemplated by this Agreement.
J. Publicly Held Corporation. A Publicly Held Corporation is a corporation registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or a corporation subject to the requirements of Section 15(d) of such Act.
K. Reserved Area. A "Reserved Area" is defined as any area of food courts (other than in retail shopping malls), airports, hospitals, cafeterias, commissaries, schools, hotels, stadiums, arenas, ballparks, festivals, fairs and other mass gathering locations or events, and the premises of certain businesses that have an agreement with Franchisor for the placement of a Restaurant in more than one of their facilities ("National Accounts").
L. The Restaurant. 'The Restaurant" shall mean the San Francisco Oven Restaurant for which the rights and license are granted to Franchisee pursuant to this Franchise Agreement.
M. SFO System Agreements. The term "SFO System Agreements" shall mean this Agreement and any other agreement, including without limitation The Development Agreement(s), between Franchisee or any of its Affiliates and Franchisor or any of its Affiliates.
N. ServSafe® Food Safety Training Program. The "ServSafe® Food Safety Training Program" shall mean the food safety training and certification program sponsored and sanctioned by the National Restaurant Association Educational Foundation.
GRANT OF FRANCHISE RIGHTS
A. License to Operate a Restaurant. In reliance on the representations and warranties of Franchisee and the Controlling Principals hereunder, Franchisor hereby grants to Franchisee, upon the terms and conditions in this Agreement, the right and license, and Franchisee hereby accepts the right and obligation, to operate one (1) Restaurant under the Marks and the System in accordance with this Agreement. Franchisee and the Controlling Principals have represented to Franchisor that they have entered into this Agreement with the intention to comply fully with the obligations to construct a Restaurant hereunder and not for the purpose of reselling the rights to develop the Restaurant hereunder. Franchisee and the Controlling Principals understand and acknowledge that Franchisor has granted such rights in reliance on the business skill, financial capacity, personal character of, and expectations of performance hereunder by, Franchisee and the Controlling Principals and that this Agreement and the rights and obligations hereunder may
not be transferred (other than to an Affiliate of Franchisee pursuant to Section XXI.) until after the Restaurant is open for business to the public and in accordance with Section IV (E).
B. Primary Area of Responsibility. The License granted under this Agreement shall apply to Franchisee's assigned Primary Area of Responsibility ("PAR") consisting of the geographical area specified in Attachment A.
C. Licensed Location. This Agreement does not grant to Franchisee the right or license to operate the Restaurant or to offer or sell any products or services described under this Agreement at or from any location other than the Licensed Location.
1. Purchased Location. If Franchisee elects to purchase the premises for the Restaurant, Franchisee shall furnish to Franchisor a copy of the executed contract of sale within ten (10) days after execution.
2. Leased Location. If Franchisee will occupy the premises of the Restaurant under a lease, Franchisee shall submit a copy of the lease to Franchisor for written approval prior to its execution and shall furnish to Franchisor a copy of the executed lease within ten (10) days after execution. No lease for the Licensed Location shall be accepted by Franchisor unless an addendum to the lease substantially in the form as set forth in Attachment B, is attached to the lease and incorporated therein. Franchisor shall have ten (10) days after receipt of the lease to either approve or disapprove such documentation prior to its execution.
3. Failure of Franchisee to obtain possession. In the event that Franchisee is unable to (i) obtain possession of the Licensed Location for the Restaurant or (ii) procure all necessary permits, licenses, variances and approvals for the operation of the Restaurant at the Licensed Location, all within six (6) months from the effective date hereof, then Franchisor shall have the right, but not the obligation to terminate this Agreement; in which event:
a) The right to develop the Restaurant granted by the Development Agreement shall be reinstated and the original development period contained in the Development schedule pertaining thereto shall be extended by six (6) months; and
b) Seventy Five percent (75%) of the initial franchise fee, or portion thereof, paid upon execution of this Agreement pursuant to Section VI(A), shall be applied by Franchisor against the initial franchise fee payable upon exercise of the development right reinstated as per Section 11(C)(3)(a) above.
D. Rights Exclusive to Franchisee. Except as provided in this Agreement, and subject to Franchisee's and the Controlling Principals' substantial compliance with this Agreement, and any SFO System Agreement, neither Franchisor nor any of its Affiliates, or any of their licensees, shall establish or authorize any other person or entity, other than Franchisee, to establish an Restaurant in the Primary Area of Responsibility during the term of this Agreement.
HI. RIGHTS RETAINED BY FRANCHISOR. Franchisee acknowledges and understands that the rights granted hereunder pertain only to the establishment of a Restaurant. Franchisee acknowledges and agrees that Franchisor and its Affiliates operate Restaurants under the Marks. Accordingly, and notwithstanding the above, Franchisor shall retain the following rights:
A. Advertising and Promotion of the System. Franchisor, any of its franchisees and any other authorized person or entity shall have the right, at any time, to advertise and promote the System, and fill customer orders by providing catering and delivery services in the PAR.
B. Sales of Collateral Products. Franchisor and its Affiliates may offer and sell (and may authorize others to offer and sell) collateral products under the Marks, at or from any location in the PAR, such as pre-packaged food and beverage products and San Francisco Oven memorabilia, provided, that all such products and memorabilia are of a quality consistent with or exceeding the quality of the products distributed by Restaurants.
C. Reserved Areas. Notwithstanding the rights granted to Franchisee pursuant to this Agreement, Franchisor shall retain the right to operate Restaurants within Reserved Areas located within the PAR, subject however, to the terms and conditions contained in the Development Agreement, and any prior rights granted to Franchisee or Developer for the operation of such Restaurants in such Reserved areas as contained therein.
D. Sales under other names or marks. Franchisor may offer or sell, or authorize others to offer and sell any products or food and beverage services, other than brick oven pizza, under any other names and marks within the PAR.
IV. SITE DEVELOPMENT, PLANS AND CONSTRUCTION. Franchisee assumes all cost, liability, expense and responsibility for obtaining and developing the Licensed Location and for constructing and equipping the Restaurant.
A. Zoning; Permits; Licenses; Certifications; Insurance. Prior to beginning the construction of the Restaurant, Franchisee shall:
1. Obtain all zoning classifications and clearances which may be required by state or local laws, ordinances or regulations or which may be necessary as a result of any restrictive covenants relating to the Licensed Location;
2. Obtain all permits, licenses and certifications required for the lawful construction or remodeling and operation of the Restaurant; and
3. Certify in writing to Franchisor that the insurance coverage specified in Section XVIII is in full force and effect and that all required approvals, clearances, permits and certifications have been obtained.
Upon request, Franchisee shall provide to Franchisor additional copies of Franchisee's insurance policies or certificates of insurance and copies of all such approvals, clearances, permits and certifications.
B. Architectural; Engineering; Design. Franchisee must obtain all architectural, engineering and design services it deems necessary for the construction of the Restaurant, at its own expense, from an architectural design firm approved by Franchisor, which approval shall not be unreasonably withheld, delayed or conditioned. Franchisee shall adapt the prototypical architectural and design plans and specifications for construction of the Restaurant provided to Franchisee by Franchisor in accordance with Section VIII (A) as necessary for the construction of the Restaurant and shall submit such adapted plans to Franchisor for review and approval. If Franchisor determines, in its reasonable discretion, that any such plans are not consistent with the best interests of the System, Franchisor may prohibit the implementation of such plans, and in this event will notify Franchisee of any objection(s), together with a reasonably detailed list of changes necessary to make the plans acceptable, within ten (10) days following receipt of such plans. If Franchisor fails to notify Franchisee of an objection to the plans within this time period, Franchisee may use such plans. Franchisor shall, upon a re-submission of the plans with such changes, notify Franchisee within ten (10) days following receipt of the resubmitted plans whether the plans are acceptable. If Franchisor fails to notify Franchisee of any objection within such time period, Franchisee may use the resubmitted plans. Franchisee acknowledges that Franchisor's review of such plans relates only to compliance with the System and that acceptance by Franchisor of such plans does not constitute a representation, warranty, or guarantee, express
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or implied, by Franchisor that such plans are accurate or free of error concerning their design or structural application.
C. Construction; Remodeling. Franchisee shall commence and diligently pursue construction or remodeling (as applicable) of the Restaurant as soon as is practicable following Franchisor's approval of such plans pursuant to Section IV(B).
1. General Contractor / Bids. Franchisee shall retain a General Contractor to bid, direct, manage, supervise, and/or perform the construction or remodeling work for the Restaurant. Such General Contractor must be approved by Franchisor in writing prior to being retained by Franchisee; which approval shall not be unreasonably withheld, delayed or conditioned. Nothing in this Section IV(C)(1) shall preclude Franchisee from acting as its own General Contractor, provided however, that Franchisee will be subject to Franchisor's approval as with a third party as provided herein.
2. Commencement. Commencement of construction shall be defined as the time at which any site work is initiated by or on behalf of Franchisee at the Licensed Location accepted for the Restaurant. Site work includes, without limitation, paving of parking areas, installing outdoor lighting and sidewalks, extending utilities, demising of interior walls and demolishing of any existing premises.
3. Reporting; Inspections. During the time of construction or remodeling, Franchisee shall provide Franchisor with such periodic reports regarding the progress of the construction or remodeling as may be reasonably requested by Franchisor. In addition, Franchisor may, at Franchisor's expense, make such on-site inspections as it may deem reasonably necessary to evaluate such progress or to inspect the completed Restaurant. Franchisee shall notify Franchisor of the scheduled date for completion of construction or remodeling no later than thirty (30) days prior to such date.
4. Authorization to Open. Franchisee acknowledges and agrees that Franchisee will not open the Restaurant for business without the written authorization of Franchisor.
D. Fixtures; Equipment; POS System; Franchisee shall furnish and equip the Restaurant with such fixtures, furniture and equipment meeting Franchisor's specifications including, without limitation, refrigerated coolers, brick oven, dishwasher, walk in cooler, shelving, mixer(s), microwave oven(s), work tables, convection oven, and small-wares. Further, Franchisee shall acquire from a vendor approved by Franchisor pursuant to Section XII(D) and install the Retail Point of Sale ("POS") System described in the Manuals to the exact specifications set forth therein, including any required upgrades, enhancements or changes therein as required as of the date of installation in the Restaurant. Franchisee's office systems shall include, in addition to telephones, a facsimile machine (or similar computer device capable of sending and receiving facsimile transmissions) and a copy machine for general use.
E. Opening Date. Franchisor and Franchisee acknowledge that time is of the essence. Subject to Franchisee's substantial compliance with the conditions stated below, Franchisee shall open the Restaurant and commence business on or before the later of (i) the one hundred and fiftieth (150th) day following the commencement of construction (as defined in Section IV (C) above) of the Restaurant at the Licensed Location, or (ii) the tenth (10th) day following completion of Franchisor's inspection and receipt of the written authorization referred to in Section IV(C) above, unless Franchisee obtains an extension of such time period from Franchisor in writing. The date the Restaurant opens for business to the public as provided herein ("Opening Date") shall be set forth in Attachment A. Prior to opening, Franchisee shall complete all exterior and interior preparations for the Restaurant, including installation of equipment, fixtures, furnishings and signs, pursuant to the plans and specifications approved by Franchisor, and shall comply with
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all other pre-opening obligations of Franchisee to Franchisor's reasonable satisfaction. If Franchisee fails to substantially comply with any of such obligations, except by reason of a Force Majeure Event, Franchisor shall have the right to prohibit Franchisee from commencing business. Franchisee's failure to open the Restaurant and commence business in accordance with the foregoing shall be deemed a material event of default under this Agreement.
V. TERM AND RENEWAL
A. Initial Term. Unless sooner terminated as provided in Section XXV. hereof, the initial term of this Agreement shall continue from the Effective Date until the earlier of (i) ten (10) years from Opening Date or (ii) the expiration or termination of Franchisee's right to possess the Licensed Location.
B. Renewal Terms. Franchisee may, at its option, renew the rights under this Agreement for additional consecutive terms of five (5) years each (provided that such renewal term shall automatically terminate upon the expiration or termination of Franchisee's right to possess the Licensed Location), subject to any or all of the following conditions which must, in Franchisor's reasonable discretion, be met prior to and at the time of renewal:
1. Franchisee shall give Franchisor written notice of Franchisee's election to renew not less than six (6) months nor more than twelve (12) months prior to the end of the initial term or first renewal term, as applicable.
2. Franchisee shall repair or replace, at Franchisee's cost and expense, equipment (including the POS System or computer hardware or software systems inclusive of any software upgrades required of Franchisee), signs, interior and exterior decor items, fixtures, furnishings, catering or delivery vehicles, if applicable, supplies and other products and materials required for the operation of the Restaurant as Franchisor may reasonably require and shall obtain, at Franchisee's cost and expense, any new or additional equipment, fixtures, supplies and other products and materials which may be reasonably required by Franchisor for Franchisee to offer and sell new menu items from the Restaurant or to provide the Restaurant's services by alternative means such as through carry-out, catering or delivery arrangements and shall otherwise modernize the Restaurant premises, equipment (including the POS System or computer hardware or software systems), signs, interior and exterior decor items, fixtures, furnishings, catering or delivery vehicles, if applicable, supplies and other products and materials required for the operation of the Restaurant, as reasonably required by Franchisor to reflect the then-current standards and image of the System and as contained in the Manuals or otherwise provided in writing by Franchisor;
3. Franchisee shall be in compliance with this Agreement, any amendment hereof or successor hereto.
4. Franchisee shall have satisfied all monetary obligations owed by Franchisee to Franchisor and its Affiliates under this Agreement;
5. Franchisee shall present satisfactory evidence that Franchisee has the right to remain in possession of the Licensed Location or obtain Franchisor's approval of a new site for the operation of the Restaurant for the duration of the renewal term of this Agreement; and
6. Franchisee and its Controlling Principals and Franchisor shall execute a mutual general release of any and all claims against each other and their respective Affiliates and partners, and the officers, directors, shareholders, partners, agents, representatives,
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independent contractors, servants and employees of each of them, in their corporate and individual capacities, including, without limitation, claims arising under this Agreement or under federal, state or local laws, rules, regulations or orders.
A. Initial Franchise Fee. Franchisee shall pay to Franchisor an initial franchise fee of Twenty-Five Thousand Dollars ($25,000) [Thirty-Five Thousand Dollars ($35,000) if the Licensed Location is within the State of Florida], reduced by that portion of the Development Fee specifically pertaining to the Licensed Location herein as set forth in the Development Agreement, if any, which shall be paid upon the execution of this Agreement. The amount of the initial franchise fee when so paid shall be deemed fully earned and non-refundable, except as provided in Section II (C) (3) hereof, in consideration of the administrative and other expenses incurred by Franchisor in granting the franchise hereunder and for its lost or deferred opportunity to grant such franchise to any other party.
B. Weekly Royalty Fee. During the term of this Agreement, Franchisee shall pay to Franchisor, in partial consideration for the rights herein granted, a continuing weekly royalty fee of five percent (5%) of Gross Sales
1. Definition of Gross Sales. For purposes of determining weekly royalty fees hereunder "Gross Sales" shall mean the total selling price of all services and products and all income of every other kind and nature related to the Restaurant or otherwise arising out of the Restaurant's operations, including without limitation sales or orders of food, food products, beverages, food preparation services, catering services, and delivery services. Gross Sales shall be determined without regard for the amounts or forms of tender received in connection therewith, except as otherwise provided herein. Gross Sales shall expressly exclude the following:
a) Vending machine / pay phone revenues. Receipts from the operation of any public telephone installed in the Restaurant, or products from vending machines located at the Restaurant, except for any amount representing Franchisee's share of such revenues.
b) Sales Tax Collected. Sums representing sales taxes collected directly from customers, based upon present or future laws of federal, state or local governments, collected by Franchisee in the operation of the Restaurant, and any other tax, excise or duty which is levied or assessed against Franchisee by any federal, state, municipal or local authority, based on sales of specific merchandise sold at or from the Restaurant, provided that such taxes are actually transmitted to the appropriate taxing authority.
c) Sales of Trade Fixtures. Proceeds from incidental sales of trade fixtures not constituting any part of Franchisee's products and services offered for resale at the Restaurant nor having any material effect upon the ongoing operation of the Restaurant required under this Agreement.
d) Discounts and Allowances. The value of Customer and employee discounts, coupons redeemed, and complimentary meals;
e) Employee Meals. The value of meals furnished to Franchisee's employees as an incident to their employment;
0 Gift Cards. The proceeds from the sale of gift cards, gift certificates, or other similar sales vouchers.
2. Determination and Due Date. The weekly royalty fee shall be based on Gross Sales for each seven day period commencing on Monday and ending on Sunday of each week ("Royalty Accounting Period") during the term hereof (the first such Royalty Accounting Period beginning on the Opening Date and ending on the next following Sunday); and shall be due and payable no later than 12:00 noon on the Wednesday next following the end of each such Royalty Accounting Period, provided that such day is a business day. A business day for the purpose of this Agreement means any day other than Saturday, Sunday and the following national holidays: New Year's Day, Martin Luther King Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day", Thanksgiving and Christmas. If the date on which such payments would otherwise be due is not a business day, then payment shall be due on the next business day.
3. Reporting. For each Royalty Accounting Period during the term hereof, Franchisor shall extract, from data generated and reported by Franchisee's POS system as contemplated in Section XII (E) (9) hereof, a weekly royalty report which shall set forth the Gross Sales and royalty fee due for such Royalty Accounting Period ("Royalty Report). Franchisor shall provide Franchisee, or Franchisee's designee, with such Royalty Report no later than 12:00 Noon on the Monday next following the end of each Royalty Accounting Period via e-mail transmission, or if such mode is not reasonably available, by facsimile transmission. Franchisee acknowledges and agrees that technical difficulties or failures may interfere with or disable Franchisee's POS system hardware, software or the POS Network from time to time. If, as a result thereof, Franchisor is unable to extract and transmit Franchisee's Royalty Report on the day and time when due hereunder, then the Royalty fee due for the applicable Accounting Period shall be estimated at the amount reported on the most recent Royalty Report provided to Franchisee by Franchisor until such time as the applicable Royalty Report is available for extraction by Franchisor from Franchisee's POS system. The amount of such estimated Royalty fee paid shall be reconciled against the actual royalty fee due, when such amount is subsequently determined, and any under payment or over payment of the royalty fee arising therefrom shall be added to or deducted from the royalty fee due for the next Royalty Accounting Period following the date on which such actual royalty fee is determined.
A. Electronic Funds Transfer Authorization. Franchisee agrees that Franchisor shall be entitled to initiate electronic debit or credit transactions ("EFT Transactions") to Franchisee's bank account for purposes of (i) collecting all fees and other amounts due by Franchisee pursuant to this Agreement, or (ii) paying any amounts due by Franchisor to Franchisee under this Agreement. The following terms and conditions shall apply to all EFT transactions initiated by Franchisor pursuant to this Agreement:
1. Franchisee's Authorization. Franchisee shall, upon execution of this Agreement or at any time thereafter at Franchisor's request, authorize Franchisor in writing to initiate debit transactions to Franchisee's designated bank account; which authorization(s) shall remain in effect at all times during the entire term of this Franchise Agreement. Such authorization shall be substantially in the form prescribed in Attachment E.
2. Timing. Franchisor may initiate EFT transactions after 12:00 Noon on the due date of each payment for which such transaction is initiated, unless such day is not a business day, in which case the transaction may be initiated on the next succeeding business day.
3. Dishonor. Should any EFT transaction not be honored by Franchisee's bank for any reason, Franchisee agrees that it shall be responsible for that payment plus a reasonable service charge applied by Franchisor and the bank, if any.
4. Bank Balance requirement. Franchisee agrees that it shall at all times throughout the term of this Agreement and for ten (10) days thereafter, maintain a balance in the bank account designated for EFT transactions sufficient to cover the amounts of such transactions.
B. Late or Non-Payment; Interest. Franchisee shall not be entitled to withhold payments due Franchisor under this Agreement on grounds of alleged non-performance by Franchisor hereunder. Any payment or report not actually received by Franchisor on or before such date shall be deemed overdue. Time is of the essence with respect to all payments to be made by Franchisee to Franchisor. All unpaid obligations under this Agreement shall bear interest from the date due until paid at the lesser of (i) eighteen percent (18%) per annum; or (ii) the maximum rate allowed by applicable law. Notwithstanding anything to the contrary contained herein, no provision of this Agreement shall require the payment or permit the collection of interest in excess of the maximum rate allowed by applicable law. If any excess of interest is provided for herein, or shall be adjudicated to be so provided in this Agreement, the provisions of this section shall govern and prevail, and neither Franchisee nor its Principals shall be obligated to pay the excess amount of such interest. If for any reason interest in excess of the maximum rate allowed by applicable law shall be deemed charged, required or permitted, any such excess shall be applied as a payment and reduction of any other amounts which may be due and owing hereunder, and if no such amounts are due and owing hereunder then such excess shall be repaid to the party that paid such interest.
C. Late Payment Fee - Royalty Fees. If any Royalty Fee payment is not received by Franchisor as required by Section VI, Franchisee shall pay to Franchisor, in addition to the overdue amount and interest pursuant to Section VII(B) above, a fee of Fifty Dollars ($50) per day for each day that the Royalty Fee remains unpaid. This fee is reasonably related to Franchisor's costs resulting from the delay in payment, is not a penalty, and is in addition to any other remedy available to Franchisor under this Agreement for Franchisee's failure to pay Royalty Fees in accordance with the terms of this Agreement. If for any reason the fee of Fifty Dollars ($50) is deemed to be interest charged, required or permitted in excess of the maximum rate allowed by applicable law, any such excess shall be applied as a payment and reduction of any other amounts which may be due and owing hereunder, and if no such amounts are due and owing hereunder, then such excess shall be repaid to the party that paid such amount.
VIII. FRANCHISOR'S OBLIGATIONS
Franchisor agrees to provide the materials, products, and/or services described below with regard to the Restaurant:
A. On Loan, Architectural and Design Plans. On loan, one (1) set of prototypical architectural and design plans and specifications for a San Francisco Oven Restaurant for adaptation to the Licensed Location for construction of the Restaurant in accordance with Section IV.
B. On-site Visits. Visits to the Restaurant and evaluations of the products sold and services rendered therein from time to time as reasonably determined by Franchisor, as contemplated by Section XII (E) (6).
C. Advertising and Promotional Materials. Certain advertising and promotional materials and information developed by Franchisor from time to time for use by Franchisee in marketing and conducting local advertising for the Restaurant at a reasonable cost to Franchisee. Franchisor
shall have the right to review and approve or disapprove all advertising and promotional materials that Franchisee proposes to use, pursuant to Section XIII.
D. Management/Operations advice. Advice and written materials, including without limitation the Manuals, concerning techniques of managing and operating the Restaurant from time to time developed by Franchisor, including new developments and improvements in equipment, food products and the packaging and preparation thereof and menu items.
E. Merchandise and Equipment. From time to time and at Franchisor's reasonable discretion, at a reasonable cost, make available for resale to Franchisee's customers, certain merchandise identified with the System, such as pre-packaged food products and San Francisco Oven memorabilia, in sufficient amounts to meet customer demand. Similarly, Franchisor may make available, from time to time, certain Restaurant equipment and decor items at a reasonable cost.
F. Approved Suppliers List. A list of approved suppliers as described in Section XII (C) from time to time as Franchisor deems appropriate.
G. Initial, Remedial and Other Training Programs. An initial training program for Franchisee's Operating Principal, General Manager and other Restaurant personnel; and other such remedial or additional training programs as required by the provisions of Section XI.
H. Pre-Opening / Post-Opening Assistance. In connection with the opening of the Restaurant, Franchisor shall provide Franchisee with opening assistance by a trained representative of Franchisor or its designee. The trainer will provide on-site pre-opening and opening training, supervision, and assistance to Franchisee for a period of two (2) weeks. Provided that the Restaurant is the first to be opened pursuant to the Development Schedule contained in the Development Agreement, all opening assistance shall be provided at no charge to Franchisee. If the Restaurant is not the first to be so opened, Franchisor may charge the per diem fee then being charged to Franchisees generally for such assistance, including any expenses incurred by Franchisor's trainer(s), such as costs of travel, lodging, meals and wages.
I. Creative Fund / Advertising Cooperative. Establishment and administration of a creative fund and/or advertising cooperatives in accordance with Section XIII.
IX. REPRESENTATIONS AND WARRANTIES OF FRANCHISEE AND CONTROLLING PRINCIPAL(S). Franchisee and the Controlling Principal(s) make the following representations, warranties and covenants and agree that they shall be continuing obligations of Franchisee and that any failure to comply with such representations, warranties and covenants shall constitute a material event of default under this Agreement. Franchisee will cooperate with Franchisor in any efforts made by Franchisor to verify compliance with such representations, warranties and covenants.
A. Organization and Authority. If Franchisee is a corporation, limited liability company, or a partnership, Franchisee represents, warrants and covenants that:
1. Franchisee is duly organized and validly existing under the state law of its formation.
2. Franchisee is duly qualified and is authorized to do business in each jurisdiction in which its business activities or the nature of the properties owned by it require such qualification.
3. Franchisee's corporate charter, operating agreement, or written partnership agreement shall at all times provide that the activities of Franchisee are confined exclusively to the development and operation of San Francisco Oven Restaurants, unless otherwise consented to by Franchisor in writing.
4. The execution of this Agreement and the performance of the transactions contemplated hereby are within Franchisee's corporate power, if Franchisee is a
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corporation, if Franchisee is a limited liability company, permitted under the operating agreement, or if Franchisee is a partnership, permitted under Franchisee's written partnership agreement and have been duly authorized.
B. Ownership Interests; Franchisee's Principals. All holder's of an ownership interest in Franchisee and all of Franchisee's principals, as such are defined herein, respectively, are accurately and completely described in Attachment C.
C. Corporate Records and Documents. If Franchisee is a corporation, or limited liability company, Franchisee represents and warrants that it has furnished to Franchisor prior to the execution of this Agreement true and correct copies of Franchisee's articles of incorporation, bylaws, operating agreement, other governing documents, any amendments thereto, resolutions of the Board of Directors authorizing entry into and performance of this Agreement, and any certificates, buy-sell agreements or other documents restricting the sale or transfer of stock of the corporation, and any other documents as may be reasonably required by Franchisor.
D. Partnership Records and Documents. If Franchisee is a partnership, Franchisee represents and warrants that it has furnished to Franchisor prior to the execution of this Agreement true and correct copies of Franchisee's written partnership agreement, other governing documents and any amendments thereto, including evidence of consent or approval of the entry into and performance of this Agreement by the requisite number or percentage of partners, if such approval or consent is required by Franchisee's written partnership agreement;
E. Financial Statements. Franchisee represents and warrants that it has provided Franchisor with financial statements of Franchisee as of a date no earlier than its most recently completed fiscal year; and that such financial statements have been prepared in conformity with generally accepted accounting principles, or such other basis of accounting as may be indicated therein, consistently applied; and present fairly the financial position of Franchisee, as of the date(s) indicated therein, and the results of Franchisee's operations and its cash flows for the periods indicate therein. Franchisee is unaware, as of the Effective Date, of the existence of any material liabilities, adverse claims, commitments or obligations of any nature, whether accrued, unliquidated, absolute,contingent or otherwise, which are not disclosed in such financial statements.
F. Restrictions on Transfer of Franchisee's Ownership Interests. Franchisee represents and warrants that as of the Effective Date, it has established and shall continuously maintain restrictions on the transfer of its ownership interest as required by this Agreement.
X. DUTIES AND OBLIGATIONS OF FRANCHISEE. Franchisee and Controlling Principal(s), as applicable, shall accept, perform and fulfill the following duties and obligations during the entire term of this Agreement:
A. Time and Effort. Franchisee and the Controlling Principals each agree to devote commercially reasonable efforts to operate the Restaurant so as to achieve optimum sales; provided however, that such efforts shall not be construed to prohibit any Controlling Principal from engaging in other business activities not precluded by Section XVI hereof.
B. Maintain and Provide Ownership Records. If Franchisee is a corporation, Franchisee shall maintain at all times a current list of all owners of record and all beneficial owners of any class of voting securities in Franchisee; or, if Franchisee is a partnership or other form of legal entity, Franchisee shall maintain at all times a current list of all owners of an interest in the partnership or entity. Franchisee shall immediately provide a copy of the updated list of all owners to Franchisor upon the occurrence of any change of ownership and otherwise make its list of owners available to Franchisor upon request;
C. Designate Franchisee's Principals. If, after the execution of this Agreement, any person or entity ceases to qualify as one of the Franchisee's Principals or if any individual or entity succeeds to or otherwise comes to occupy a position which would qualify him/her/it as one of Franchisee's Principals as defined herein, Franchisee shall notify Franchisor within ten (10) days after any such change and, upon designation of such person or entity by Franchisor as one of Franchisee's Principals or as a Controlling Principal, as the case may be, such person or entity shall execute such documents and instruments (including, as applicable, this Agreement) required to bind such person or entity to the same extent the person or entity being replaced was bound hereunder;
D. Maintain Restrictions on Transfer of Franchisee's Ownership Interests. If Franchisee is a corporation, Franchisee shall maintain stop-transfer instructions against the transfer on its records of any of its equity securities and each stock certificate representing stock of the corporation shall have conspicuously endorsed upon it a statement in a form satisfactory to Franchisor that it is held subject to all restrictions imposed upon assignments by this Agreement; provided, however, that the requirements of this Section shall not apply to the transfer of equity securities of a Publicly Held Corporation. If Franchisee is a partnership, its written partnership agreement shall provide that ownership of an interest in the partnership is held subject to all restrictions imposed upon assignments by this Agreement;
E. Confidentiality Agreement and Ancillary Covenants Not to Compete. The Franchisee shall cause each of Franchisee's Principals to execute and bind themselves to the confidentiality and non-competition covenants set forth in the Confidentiality Agreement and Ancillary Covenants Not to Compete which forms are set forth in Attachment D to this Agreement; and to provide Franchisor with copies of such fully executed agreements.
F. Designate and retain an Operating Principal. Upon the execution of this Agreement, and thereafter for the entire term of this Agreement, Franchisee shall designate and retain an Operating Principal of the Restaurant who, at his/her/its option, may also serve as the Restaurant's General Manager, and who shall execute this Agreement as one of the Controlling Principals. If Franchisee is an individual, Franchisee shall perform all obligations of the Operating Principal. The Operating Principal shall use his/her/its best efforts and devote such time and effort as is commercially reasonable to the supervision and conduct of the business contemplated by this Agreement. The following qualifications, terms, conditions and covenants shall apply to the Operating Principal under this Agreement:
1. The Operating Principal may, at his/her/its option, and, subject to the approval of Franchisor, designate an individual to perform the duties and obligations of the Operating Principal, as defined herein; provided that the Operating Principal shall take all necessary action to ensure that such designee conducts and fulfills all of such duties and obligations in accordance with the terms of this Agreement and Operating Principal shall remain fully responsible for such performance.
2. The Operating Principal must maintain a direct or indirect ownership interest in Franchisee. Except as may otherwise be provided in this Agreement, the Operating Principal's interest in Franchisee shall be and shall remain free of any pledge, mortgage, hypothecation, lien, charge, encumbrance, voting agreement, proxy, or security interest. The foregoing shall not be construed to prohibit purchase options, transfer restrictions and other provisions customarily incorporated into shareholder, partnership or operating agreements.
3. The Operating Principal (and any such designee) shall meet Franchisor's reasonable and uniformly applied standards and criteria for such individual or entity, as set forth in the Manuals as defined herein or otherwise in writing by Franchisor.
4. If, during the term of this Agreement, the Operating Principal or any designee is not able to continue to serve in the capacity of Operating Principal or no longer qualifies to act as such in accordance with this Section, Franchisee shall promptly notify Franchisor and designate a replacement within sixty (60) days after the Operating Principal or such designee ceases to serve, such replacement being subject to the same qualifications and restrictions listed above. Franchisee shall provide for interim management of the activities contemplated under this Agreement until such replacement is so designated, such interim management to be conducted in accordance with this Agreement. Any failure to comply with the requirements of this Section X(F)(4) shall be deemed a material event of default under this Agreement.
G. Designate and Retain a General Manager. Upon the execution of this Agreement, and at all times thereafter during the term of this Agreement, Franchisee shall designate and retain a general manager ("General Manager") to direct and be responsible for the operation and management of the Restaurant, and who shall devote full time and best efforts to the supervision and management of the Restaurant's day to day operations. The following qualifications, terms, conditions and covenants shall apply to the General Manager under this Agreement:
1. The General Manager shall satisfy Franchisor's reasonable and uniformly applied educational, training and business experience criteria as set forth in the Manuals or otherwise in writing by Franchisor and otherwise be reasonably acceptable to Franchisor;
2. If, during the term of this Agreement, the General Manager is not able to continue to serve in such capacity or no longer qualifies to act as such in accordance with this Section X(G), Franchisee shall promptly notify Franchisor and designate a replacement within sixty (60) days after the General Manager ceases to serve, such replacement being subject to the same qualifications listed above (including completing all training and obtaining all certifications required by Franchisor. Franchisee shall provide for interim management of the Restaurant until such replacement is so designated, such interim management to be conducted in accordance with the terms of this Agreement. Any failure to comply with the requirements of this Section X(G) shall be deemed a material event of default pursuant to Section XXV hereof.
H. Adherence to laws, rules and regulations. Franchisee shall comply with all requirements of federal, state and local laws, rules, regulations, and orders, including without limitation obtaining the appropriate licenses for the sale of alcoholic beverages as may be required by Franchisee's local or state government.
XI. FRANCHISEE'S TRAINING. Franchisee agrees that it is necessary to the continued operation of the System and the Restaurant that Franchisee's Operating Principal, General Manager, and other Restaurant personnel receive and complete such training as Franchisor may reasonably and uniformly require. Accordingly, Franchisee shall accept and ensure the performance and fulfillment of the following training obligations:
A. Mandatory Initial Training Program. Provided that the Restaurant is the first to be opened pursuant to the Development Agreement, Franchisee's initial management group shall be required to attend and complete, to Franchisor's satisfaction, Franchisor's initial training program no later than thirty (30) days prior to the date the Restaurant commences operations, in accordance with the following terms:
1. Personnel required to be Trained. For purposes of this Section XI, the initial management group shall consist of Franchisee's Operating Principal, General Manager, and, one other employee as Franchisee may designate.
2. Pre-requisites. Prior to attending the initial training program, each member of the initial management group to be trained must have first successfully completed the ServSafe® Food Safety Training Program and attained the designation as a certified ServSafe® Manager as a result thereof.
3. No Fee for Initial Management Group. Franchisor shall provide the initial training program, including all instructors and materials related thereto, to Franchisee's initial management group defined above at no charge to Franchisee.
4. Additional Personnel. Franchisee, at its option, may designate managers or other restaurant personnel, in addition to the initial management group, to attend Franchisor's initial training program at any time during the term hereof; provided however, that Franchisor may charge a training fee for training such additional personnel.
5. Training Location. The initial training program shall be conducted by Franchisor or its designee at a Franchisor or designee-operated Restaurant or such other location designated by Franchisor.
6. Satisfactory Completion. Franchisor shall determine, in its discretion, whether each member of the initial management group has satisfactorily completed initial training. If the initial training program is not satisfactorily completed by any member of the initial management group, or if Franchisor in its business judgment based upon the performance of any such person, determines that the training program cannot be satisfactorily completed by any such person, Franchisee shall designate a replacement to satisfactorily complete such training.
7. Incidental Costs and Expenses. Franchisee shall be responsible for any and all expenses incurred by Franchisee or Franchisee's initial management group and other Restaurant personnel in connection with any initial training program, including, without limitation, costs of travel, lodging, meals and wages,
B. Non-Mandatory Initial Training. Provided that the Restaurant is not the first to be opened pursuant to the Development Agreement, Franchisee's initial management group may, at Franchisee's option, attend and complete, to Franchisor's satisfaction, Franchisor's initial training program no later than thirty (30) days prior to the date the Restaurant commences operations, in accordance with the same terms and conditions as described in Section XI(A) above. If, however, either the Operating Principal or the General Manager, or both of them, have previously attended and successfully completed Franchisor's initial training program, then Franchisee may, at its option, designate such other employee(s) to replace such person as a member of the initial management group for purposes of the initial training program; provided however that in no event shall the initial management group consist of more than three (3) individuals.
C. Additional Training. Franchisee's Operating Principal, General Manager and such other Restaurant personnel as Franchisor shall designate shall attend such additional training programs and seminars as Franchisor may offer from time to time, if Franchisor requires such attendance. For all such programs and seminars, Franchisor will provide the instructors and training materials. However, Franchisor reserves the right to impose a reasonable fee for such additional training programs and seminars that are not mandatory. Franchisee shall be responsible for any and all expenses incurred by Franchisee or its personnel in connection with such additional training, including, without limitation, costs of travel, lodging, meals, and wages.
D. On-Site Remedial Training. Upon the reasonable request of Franchisee or as Franchisor shall deem appropriate, Franchisor shall, during the term hereof, subject to the availability of personnel, provide Franchisee with additional trained representatives who shall provide on-site
remedial training and assistance to Franchisee's Restaurant personnel. For additional training and assistance requested by Franchisee, Franchisee shall pay the per diem fee then being charged to franchisees under the System for the services of such trained representatives, plus their costs of travel, lodging, meals, and wages. The per diem fee will not be charged if such assistance is provided based on Franchisor's determination that such training and assistance is necessary; however, Franchisor reserves the right to charge for its reasonable expenses incurred in connection with such training and assistance.
XII. FRANCHISE OPERATIONS. Franchisee acknowledges and understands the importance of maintaining uniformity among all of the Restaurants and therefore agrees to comply with all of Franchisor's standards and specifications relating to the operation of the Restaurant as set forth below:
A. Sanitation. Maintenance and Repair. Franchisee shall, at Franchisee's cost and expense, maintain the Restaurant in a high degree of sanitation, repair and condition, and in connection therewith shall make such additions, alterations, repairs and replacements thereto (but no others without Franchisor's prior written consent, not to be unreasonably withheld, delayed or conditioned) as may be required for that purpose, including, without limitation, such periodic repainting or replacement of obsolete signs, furnishings, equipment, and decor as Franchisor may reasonably direct in order to maintain system wide integrity and uniformity. Franchisee shall also obtain, at Franchisee's cost and expense, any new or additional equipment, fixtures, supplies and other products and materials which may be reasonably required by Franchisor throughout the System to offer and sell new menu items or to provide the Restaurant services by alternative means, such as through carry-out, catering or delivery arrangements. Except as may be expressly provided in the Manuals, no alterations or improvements or changes of any kind in design, equipment, signs, interior or exterior decor items, fixtures or furnishings shall be made in or about the Restaurant or its premises without the prior written approval of Franchisor, which shall not be unreasonably withheld, delayed or conditioned.
B. Point of Sale Computer System. Throughout the term of this Agreement, Franchisee shall, at Franchisee's cost and expense, maintain the computer hardware, software and peripheral equipment pertaining to the POS System in a manner which:
1. Ensures, to the fullest extent possible, full functionality and availability of the system during all hours of operation of the Restaurant throughout the entire term of this Agreement.
2. Substantially maintains the accuracy and integrity of any data base required for effective operation of the POS System.
3. Reasonably protects such data bases from corruption, erasure or loss.
4. Continually upgrades the POS system software to comply with prevailing system standards and so that it is at all times during the term hereof, the same version as is used by all San Francisco Oven Restaurants system-wide.
C. Modernization. To assure the continued success of the Restaurant, Franchisee shall, upon the request of Franchisor, make other improvements to modernize the Restaurant premises, equipment, signs, interior and exterior decor items, fixtures, furnishings, supplies and other products and materials required for the operation of the Restaurant to Franchisor's then-current system wide standards and specifications. Notwithstanding the above, Franchisee agrees that it will make such capital improvements or modifications described in this Section XII.C. if so requested by Franchisor on or before the fifth (5th) anniversary of the Opening Date, provided that all of the Restaurants then operated by Franchisor or its Affiliates have made or are utilizing best efforts to make such improvements, and all Franchisees are required to complete such
modifications or improvements before the fifth (5th) anniversary of the Opening Date of their respective Restaurants, system wide.
D. Purchasing. Franchisee shall substantially comply with all of Franchisor's standards and specifications relating to the purchase of all food and beverage items, ingredients, supplies, materials, fixtures, furnishings, equipment (including the POS System and computer hardware and software systems) and other products used or offered for sale at the Restaurant.
1. Use of Approved Suppliers. Except as provided in Sections XH(E) and XII(G) with respect to certain materials bearing the Marks and proprietary products, and Section XII.J. with respect to vehicles used in the operation of the Restaurant, Franchisee shall obtain such items from suppliers (including manufacturers, distributors and other sources) who continue to demonstrate the ability to meet Franchisor's then-current standards and specifications for food and beverage items, ingredients, supplies, materials, fixtures, furnishings, equipment and other items used or offered for sale at Restaurants and who possess adequate quality controls and capacity to supply Franchisee's needs promptly and reliably; and who have been approved in writing by Franchisor prior to any purchases by Franchisee from any such supplier; and who have not thereafter been disapproved by Franchisor.
2. Use of Unapproved Suppliers. If Franchisee desires to purchase, lease or use any products or other items from an unapproved supplier, Franchisee shall submit to Franchisor a written request for such approval, or shall request the supplier itself to do so. Franchisee shall not purchase or lease from any supplier until and unless such supplier has been approved in writing by Franchisor. Franchisor shall have the right to require that its representatives be permitted to inspect the supplier's facilities, and that samples from the supplier be delivered, either to Franchisor or to an independent laboratory designated by Franchisor for testing. A charge, not to exceed the reasonable cost of the inspection and the actual cost of the test, shall be paid by Franchisee or the supplier. Franchisor reserves the right, at its option, to re-inspect from time to time the facilities and products of any such approved supplier and to revoke its approval upon the supplier's failure to continue to meet any of Franchisor's then-current criteria. Nothing in the foregoing shall be construed to require Franchisor to approve any particular supplier.
3. Exempt Commodities. Franchisee may purchase or otherwise procure any products or other items designated in the Manuals by Franchisor as an "exempt commodity" from any approved or unapproved supplier of Franchisee's choosing.
E. Restaurant Operations. To ensure that the highest degree of quality and service is maintained, Franchisee shall operate the Restaurant in conformity with such methods, standards and specifications of Franchisor set forth in the Manuals and as may, from time to time, otherwise be prescribed in writing, including without limitation, the following:
1. To sell or offer for sale all menu items, products and services required by Franchisor and in the method, manner and style of distribution prescribed by Franchisor, including, but not limited to, eating-in, carry-out, catering or delivery services, only as expressly authorized by Franchisor in writing in the Manuals or otherwise. Franchisee agrees to comply with the terms of any such distribution program and in connection therewith to execute such documents or instruments that Franchisor may reasonably deem necessary to such program.
2. To sell and offer for sale only the menu items, products and services that have been expressly approved for sale in writing by Franchisor; to refrain from deviating from
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Franchisor's uniform standards and specifications without Franchisor's prior written consent; and to discontinue selling and offering for sale any menu items, products or services which Franchisor may, in its reasonable discretion, disapprove in writing at any time.
3. To maintain in sufficient supply and to use and sell at all times only such food and beverage items, ingredients, products, materials, supplies and paper goods that conform to Franchisor's standards and specifications; to prepare all menu items in accordance with Franchisor's recipes and procedures for preparation contained in the Manuals or other written directives, including, but not limited to, the prescribed measurements of ingredients; and to refrain from deviating from Franchisor's standards and specifications by the use or offer of non-conforming items or differing amounts of any items, without Franchisor's prior written consent.
4. To permit Franchisor or its agents, during normal business hours, to remove a reasonable number of samples of food or non-food items from Franchisee's inventory or from the Restaurant, without payment therefor, in amounts reasonably necessary for testing by Franchisor or an independent laboratory to determine whether such samples meet Franchisor's then-current standards and specifications. In addition to any other remedies it may have under this Agreement, Franchisor may require Franchisee to bear the cost of such testing if the supplier of the item has not previously been approved by Franchisor or if the sample fails to conform with Franchisor's reasonable specifications.
5. To purchase or lease and install, at Franchisee's expense, all fixtures, furnishings, equipment (including the POS System and computer hardware and software systems), decor items, signs, catering or delivery vehicles, and related items as Franchisor may direct from time to time in the Manuals or otherwise in writing; and to refrain from installing or permitting to be installed on or about the Restaurant premises, without Franchisor's prior written consent, any fixtures, furnishings, equipment, catering or delivery vehicles, decor items, signs, games, vending machines or other items not previously approved as meeting Franchisor's standards and specifications. If any of the property described above is leased by Franchisee from a third party, a copy of such lease shall be provided to Franchisor prior to execution.
6. To grant Franchisor and its agents the right to enter upon the Restaurant premises and any catering or delivery motor vehicles, during normal business hours, for the purpose of conducting inspections; to cooperate with Franchisor's representatives in such inspections by rendering such assistance as they may reasonably request; and, upon notice from Franchisor or its agents and without limiting Franchisor's other rights under this Agreement, to take such steps as may be necessary to correct immediately any deficiencies detected during any such inspection. Should Franchisee, for any reason, fail to correct such deficiencies within a reasonable time, Franchisor shall have the right and authority (without, however, any obligation to do so) to correct such deficiencies and charge Franchisee a reasonable fee for Franchisor's expenses in so acting, payable by Franchisee immediately upon demand.
7. To maintain a competent, conscientious, trained staff and to take such steps as are necessary to ensure that its employees preserve good customer relations and comply with such dress code as Franchisor may prescribe from time to time.
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8. To ensure that at least one (1) ServSafe® certified Manager or staff member is working and on duty during all hours of Restaurant operation.
9. To acquire, install and maintain, continuously during the entire term hereof, such communications equipment, services and systems, as may be uniformly specified by Franchisor from time to time in the Manuals, as are necessary to facilitate the electronic transmission of data from and to Franchisee's POS and other computer systems by Franchisor or its designated POS service providers, (collectively, "Data Communications System"). Such Data Communications System shall include, without limitation, a high speed internet connection (e.g., DSL, Cable modem, etc.) and be configured at all times to allow Franchisor access to Franchisee's data base and to retrieve therefrom information pertaining to Franchisee's Restaurant, Gross Sales, and other such information contained or stored therein. It shall be a material default under this Agreement if Franchisee fails to maintain such Data Communications System in operation and accessible to and by Franchisor at all times throughout the term of this Agreement.
F- Pricing. With respect to the offer and sale of all menu and beverage items, Franchisor may from time to time offer guidance with respect to the selling price for such goods, products and services. -Franchisee is in no way bound to adhere to any such recommended or suggested price. Franchisee shall have the right to sell its products and provide services at any price that Franchisee may determine. If Franchisee elects to sell any or all its products or merchandise at any price recommended by Franchisor, Franchisee acknowledges that Franchisor has made no guarantee or warranty that offering such products or merchandise at the recommended price will enhance Franchisee's sales or profits.
G. Proprietary Products: Recipes. Franchisee acknowledges and agrees that Franchisor has and may continue to develop for use in the System certain products which are prepared from confidential proprietary recipes and which are trade secrets of Franchisor and other proprietary products bearing the Franchisor's Marks. Because of the importance of quality and uniformity of production and the significance of such products in the System, it is to the mutual benefit of the parties that Franchisor closely control the production and distribution of such products. Accordingly, Franchisee agrees that if such products become a part of the System, Franchisee shall use only Franchisor's secret recipes and proprietary products and shall purchase solely from Franchisor or from a source designated by Franchisor all of Franchisee's requirements for such products. Franchisee further agrees to purchase from Franchisor for resale to Franchisee's customers certain merchandise identifying the System as Franchisor shall require, such as prepackaged food products and San Francisco Oven memorabilia and promotional products, in amounts sufficient to satisfy Franchisee's customer demand. Proprietary food products, products bearing the Marks and other San Francisco Oven memorabilia and promotional products which Franchisee purchases from Franchisor or its Affiliates will be sold to Franchisee at cost, plus storage, shipping, handling, a reasonable markup (not to exceed five (5%) percent of cost) and an amount to compensate Franchisor or its Affiliate for administrative overhead in connection with facilitating the sale (not to exceed five (5%) percent of cost).
H. Advertising and Promotional Materials. Franchisee shall require all advertising and promotional materials, signs, decorations, paper goods (including menus and all forms and stationery used in the Franchised Business), and other items which may be designated by Franchisor to bear the Marks in the form, color, location and manner prescribed by Franchisor.
I. Consumer Complaints. Franchisee shall process and handle ail consumer complaints connected with or relating to the Restaurant, and shall promptly notify Franchisor by telephone and in writing of all of the following complaints: (i) food related illnesses, and (ii) safety or health
violations. Franchisee shall maintain for Franchisor's inspection any inspection reports affecting the Restaurant or equipment located in the Restaurant during the term of this Agreement and for thirty (30) days after the expiration or earlier termination hereof.
J. Assignment of Telephone numbers; Internet sites and listings. Upon the execution of this Agreement or at anytime thereafter, Franchisee shall, at the option of Franchisor, execute such forms and documents as Franchisor deems necessary to appoint Franchisor its true and lawful attorney-in-fact with full power and authority for the sole purpose of assigning to Franchisor only upon the termination or expiration of this Agreement, as required under Section XXVI(O) all rights to the telephone numbers of the Restaurant and any related and other business listings; and (ii) Internet listings, domain names, Internet Accounts, advertising on the Internet or World Wide Web, websites, listings with search engines, e-mail addresses or any other similar listing or usages related to the Franchised Business. Franchisee may establish a website or listing on the Internet or World Wide Web, provided that such site or listing conforms to Franchisor's Template uniformly employed throughout the System and Franchisee obtains Franchisor's prior written consent for such site or listing, which consent shall not be unreasonably withheld, delayed or conditioned.
K. Copies of Tax Returns and Reports. During the term of this Agreement upon Franchisor's request, Franchisee shall provide copies of any and all returns and reports filed by Franchisee with any state or federal taxing authority, pertaining only to the Franchised Business, provided that the information will be treated confidentially and not disclosed to third parties without the prior written consent of Franchisee.
L. Vehicles; Drivers. Any vehicle used by Franchisee to deliver Restaurant products and services to customers shall meet Franchisor's uniform standards with respect to appearance and ability to satisfy the requirements imposed on Franchisee hereunder. Franchisee shall place such signs and decor items on the vehicle as Franchisor requires and shall at all times keep such vehicle clean and in good working order. Franchisee shall not knowingly employ, engage or utilize any individual in the operation of a motor vehicle in connection with providing services hereunder who (i) is under the age of eighteen (18) years, (ii) does not possess a valid driver's license under the laws of the state in which Franchisee provides such services, (iii) is not an acceptable insurance risk by Franchisee's insurance carrier, or (iv) has been convicted of driving under the influence of alcohol or any other controlled substance within five (5) years prior to being so employed, engaged or utilized. Franchisee shall require each such individual to comply with all laws, regulations and rules of the road and to use due care and caution in the operation and maintenance of motor vehicles. Except as noted above, Franchisor does not set forth any standards or exercise control over any motor vehicle utilized by Franchisee.
M. Unauthorized products; services. In the event Franchisee sells any food, beverage, products, premiums, novelty items, clothing, souvenirs or performs any services that Franchisor has not prescribed, approved or authorized, Franchisee shall immediately, following notice from Franchisor: (i) cease and desist offering or providing the unauthorized or unapproved food, beverage, product, premium, novelty item, clothing, souvenir or from performing such services and (ii) pay to Franchisor, on demand, a prohibited product or service fine equal to Two Hundred Fifty Dollars ($250) per day for each day, following receipt of Franchisor's written demand that Franchisee cease offering the unauthorized product or service, such unauthorized or unapproved food, beverage, product, premium, novelty item, clothing, souvenir or service is offered or provided by Franchisee. The prohibited product or service fine shall be in addition to all other remedies available to Franchisor under this Agreement or at law.
XIII. ADVERTISING; ADVERTISING FEES; PRICING. Recognizing the value of advertising and the importance of the standardization of advertising programs to the furtherance of the goodwill and public image of the System, the parties agree as follows:
A. Systemic Advertising and Promotion Programs. Franchisor may from time to time develop and create advertising and sales promotion programs designed to promote and enhance the collective success of all Restaurants operating under the System. Franchisee shall participate in all such Systemic advertising and sales promotion programs in accordance with the terms and conditions established by Franchisor for each program; and shall pay Franchisor for such advertising and promotional materials pertaining thereto. In all aspects of these programs, including, without limitation, the type, quantity, timing, placement and choice of media, market areas and advertising agencies, the standards and specifications established by Franchisor shall be final and binding upon Franchisee.
B. Minimum Annual Local Advertising Budget. In addition to the ongoing advertising contributions set forth herein and, subject to any allocation of Franchisee's expenditures for local advertising to the Cooperative as described in Section XIII(D) or Creative Fund as described in Section XIII(C), Franchisee shall spend, annually throughout the term of this Agreement, not less than two percent (2%) of the Gross Sales of the Restaurant on advertising for the Restaurant in its Area of Primary Responsibility ("Local Advertising")- Franchisee shall submit to Franchisor annually an advertising expenditure report accurately reflecting such expenditures for the preceding period on or before the 1 st business day of February following the end of each calendar year. Costs and expenditures incurred by Franchisee in connection with any of the following shall not be included in Franchisee's expenditures on Local Advertising for purposes of this Section, unless approved in advance by Franchisor in writing:
1. Incentive programs for employees or agents of Franchisee; including the cost of honoring any coupons distributed in connection with such programs.
2. Research expenditures.
3. Food costs incurred in any promotion.
4. Salaries and expenses of any employees of Franchisee, including salaries or expenses for attendance at advertising meetings or activities.
5. Charitable, political or other contributions or donations.
6. In-store materials consisting of fixtures or equipment.
7. Seminar and educational costs and expenses of employees of Franchisee.
C. Creative Fund. Franchisor reserves the right to establish and administer a creative fund for the purpose of advertising the System on a regional or national basis (the "Creative Fund"). Franchisee agrees to contribute to the Creative Fund one percent (1%) of the Gross Sales reported in its Weekly Royalty Report on the day and in the manner prescribed for the Royalty Fee as set forth in Section VI(B) (the "Advertising Fee"). Franchisor may upon thirty (30) days notice, require Franchisee to allocate to the Creative Fund, all or any portion of Franchisee's required contributions to a Cooperative as described in Section XIII(D) or expenditures for Local Advertising as described in Section XHI(B); provided that reallocation of advertising contributions is uniformly and equitably applied throughout the System. Franchisor shall, however, not increase the Advertising Fee, expressed as a percentage of Gross Sales, by more than one tenth of one percent (0.1%) per year during the term hereof. In reviewing and modifying the Advertising Fee, Franchisor shall consider the level of advertising expenditures by Restaurants operated by Franchisor or its Affiliates and by competitors of the System, media
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