Damages awarded for breach of exclusive territory provision in franchise agreement

Franchise business systems are popular for many reasons. Many retail based franchise systems provide a degree of security, a form of limited "monopoly" or exclusivity, if you like, by granting exclusive territory rights to the franchisee for the duration of the franchise relationship. There are varied forms of such rights, but if that right is breached by the franchisor, what exactly can a franchisee recover from such a breach?

A decision of a single judge of the Federal Court (Haviv Holdings v Howards Storage World) handed down just a few days ago provides some answers.

This court decision also shows that:

• The court will grant relief, even where the breach appears to be relatively minor on its face. A breach is a breach!
• If loss is suffered caused by a breach of contract, difficulties calculating that loss will not of itself defeat a claim.
• The court will, when assessing damages that are said to flow from future losses, apply certain discounts to the calculated gross loss.
• Importantly, the court found that in calculating the damages, it would look at losses suffered up to the end of the last option period, even though those options may have not been exercised by the franchisee.
• Breach by franchisors of exclusive contract territory rights granted to franchisees is something that is take lightly - check the wording of the exclusive territory provisions in your franchise agreement!

Howards Storage World (HCW) is a specialty retailer of household storage items. In 2002 HCW entered a franchise agreement with Haviv allowing Haviv to operate a HCW store at Burwood (a Sydney suburb). That agreement granted to Haviv an exclusive franchise territory, being the area within a 5 km (or 5,000 metres) radius of the Burwood store.

In 2004 HCW granted a HCW franchise to someone else to operate a HCW store in the Rhodes shopping centre. The Rhodes store, indeed the whole Rhodes shopping centre, was between 4,837 and 4,843 metres from the HCW Burwood store; in round figures, only about 160 metres inside the exclusive territory granted to Haviv.

HCW admitted it breached the territory provision. Haviv claimed, and could show, to have suffered loss and damage by reason of HSW's breach. Haviv eventually ceased operating the Burwood store. HCW claimed it terminated the franchise agreement due to alleged breaches by Haviv, whereas Haviv denied this and claimed otherwise.

The court found that Haviv was entitled to claim damages. It considered different scenarios, or methodologies, of how those damages are to be calculated.

Importantly for the franchisee, the court found that the damages should take into account Haviv's loss of net profits for the period until the expiry of the last option for renewal period, in the year 2022.

In further assessing the damages, the court found that various discounts were to be applied to allow for various factors were to be taken into account, such as future refurbishment costs during the terms of the leases, rent increases and other "vicissitudes of life" - these are the unknown factors and risks that affect people during their lifetime generally.

This decision applied a principle that where there has been an actual loss, the law does not permit difficulties in calculating the loss to defeat the only remedy it provided for breach of contract, an award of damages.

The court adjourned the matter for the parties' experts to calculate Haviv's loss, or damages, based on the court's findings on how that loss is to be calculated.

Falling interest rates are claiming some home loan victims

If you're on a fixed rate home loan, make some enquiries before you commit to re-financing or discharging that loan. Remember, if you're selling a property, that usually means you'll be also discharging your current loan.

Despite all the gloomy financial news from the onset of the current global financial crisis, most Australian home borrowers, particularly those who've been repaying their loan for some time, at least were able to grasp the positive benefits of falling interest rates, significant reduced interest and/or repayments on their mortgages... or have they?

Believe it or not, there are financial victims from falling interest rates. If your home loan is a fixed interest rate loan for a fixed period, then beware!

Fixed interest rate mortgage loans are those where a borrower's mortgage interest rate and repayments are fixed for a set period. They make it possible for borrowers to avoid interest rate increases on their fixed rate home loan. Their popularity therefore tends to increase in times of rising interest rates. Depending on their circumstances and advice obtained at the time the loan was first obtained, these borrowers can set the fixed rates for periods from 12 months to 5 years or more.

Fixed interest rate mortgage loans are also a gamble. The sting is what happens in times of falling interest rates. If you're a borrower who wants to switch loans, or pay off a fixed rate home loan (usually when selling a property) watch out for those break costs.

Break costs is the additional amount, over the amount of the loan still outstanding and owning, you must repay to a lender. If you repay your home loan before the agreed fixed rate period ends and interest rates have gone down, the lender can only re-lend those funds it recovers from you at a lower rate than the rate they had you locked into. The break costs is the lender's claim for the financial loss they "suffer" from this.

There have been previous reports about a rise in complaints made about banks' break costs charges.

This doesn't surprise me. I too have noted similar complaints in the same period about the same issue from my own clients. Calculating break costs can be quite complex and involves many variables.

One client, aware of the issue a couple of months ago, enquired to his bank when deciding whether to sell his investment property. His bank quoted a break costs fee of $7,000.00. With that information he committed to a sale. As there have been at least 2 interest rate decreases since, his bank now advises this fee increased to over $18,000.00!! Furthermore, with his sale due to be completed in 2 weeks, his bank warned that this fee will increase again if there's a another fall in official interest rates.

If you're deciding whether to re-finance your current fixed rate home loan, whether to sell a property where you have a fixed rate loan, or even if you're thinking about switching to a fixed rate loan, the least you should consider doing before committing yourself includes:

• Ask! Ask you lender if break costs apply to you if you discharge that loan.
• Ask how those costs are calculated
• Ask if it is prepared to waive or at reduce those costs
• Will your lender agree to commit to quoted break costs remaining unchanged at least for a short period, regardless of interest rate movements?
• Consider and compare the real savings from taking out a new loan with lower interest rate, compared to the costs you'll incur for discharging your current loan.
  
• If you feel you've been charged break costs improperly, or have been misled, seek professional advice, or contact the Banking & Financial Services Ombudsman.
  

Deciding when to buy... tougher decision for First Home Buyers

With handouts by the federal and NSW state governments totalling up to $24,000.00, plus stamp duty concessions in NSW all available to first home buyers, making that decision on whether, or rather, when, to buy just gets tougher.

On the one hand, there's evidence of continuing falling home prices. So, do you wait until they fall further?

But, the additional government cash handouts are scheduled to end by 30 June 2009.

Does the Reserve Bank's hold on further reducing official interest rates (see this news item) send a positive signal for the economy? If so, could that result in home prices holding, or maybe even increase?

No, I don't have an answer, and my crystal ball is in for a major service, but John Kavanagh's article in the Money section of today's Sydney Morning Herald provides some helpful insights.