We are urging all franchisees of Subway branded restaurants to review their leases and franchise agreements without delay.
While COVID-19 has hit the food service industry hard, the impact has been particularly devastating for many Subway Restaurant franchisees in North America.
Franchisees come in many sizes. Some of the franchisees that we represent operate many Subway franchises along with other food and fuel franchises along major highways, others operate any number of franchises within a geographic area, many operate one or two. While we do represent franchisees from all over the world, the majority of our clients operate franchises within North America.
Many Subway franchises were struggling financially before COVID-19 hit North America. As a result, many franchises did not have the working capital cushion that they might have had a decade earlier.
The problem for many franchisees is being exacerbated by the fact that they do not have direct leases with their landlords. That is because Doctors Associates, Inc. (the Subway Restaurant franchisor), requires franchisees to enter into subleases from Subway Real Estate, Inc., with Subway Real Estate controlling the lease with the actual landlord. While many landlords are willing to work with restaurants to adjust rent schedules to allow the restaurants a chance to survive, Subway franchisees are learning that Subway Real Estate, LLC is unwilling to allow the rent schedule adjustments that the franchisees and the property owner would otherwise accept.
The result is that Subway Franchises are being compelled to absorb losses that other restaurants are not.
Unfortunately, the problems for many franchisees do not stop there. Franchisees with one or two franchises are finding that their contracts to sell their franchises to other qualified operators of Subway franchises are not being approved, causing owners to shutter stores that they otherwise might have been able to sell.
Because Subway franchise agreements require that disputes with Doctor’s Associates be arbitrated in Connecticut, and because there are no published decisions from arbitrations, most lawyers do not know what can be expected in arbitrations against Doctors Associates. While we do not know what has happened in arbitrations in which we were not active, we do know what results have been obtained in all the arbitrations that we have handled for our clients.
The acquisition and operation of a Subway Restaurant is not an insignificant investment. Before a franchise is closed, or transferred for less than fair value, we urge franchisees to speak with their attorneys.
For more information, please contact Myles Alderman.