Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Cal. App.: Franchise fees properly cut from ‘net sales’ to invoke rent reduction, (Sep 12, 2016)

By E. Darius Sturmer, J.D.

The operator of a La Salsa Fresh Mexican Grill restaurant was entitled to a rent reduction from its landlord based on the deductibility of its franchise fees from the "net sales" threshold stated in its lease, the California Court of Appeal in Los Angeles has ruled in an unpublished opinion. The lower court’s entry of judgment in favor of the operator was therefore affirmed (Goldmex, Inc. v. Glendale I Mall Associates, LLC, September 8, 2016, Baker, L.).

The plaintiff had operated the restaurant in that location for 15 years when it entered into a new lease agreement that contained a "safety net" in the form of the potential rent reduction provision. The provision was intended to help the restaurant survive if it suffered a downturn in business as a result of a remodel mandated by the new lease and new local competition. It gave the operator the right to pay a reduced rent if its net sales fell below $800,000 for a continuous 12-month period. The operator exercised that right after reporting to its landlord net sales for a span of 2010-2011 that fell just under that threshold when it subtracted the six percent in franchise fees it paid to La Salsa, a recalculation of net sales that it had not previously practiced.

The lease agreement’s explicit exclusion, from the definition of net sales, of "the proceeds of the sale of any franchise to operate the business on the Premises and all fees, charges or charges [sic] from such franchise" was sufficiently ambiguous that it could be reasonably interpreted to permit deducting or excluding franchise fees, the appellate court decided. While consideration of the text alone allowed for a reasonable conclusion that the provision covered only proceeds, fees, or charges from a franchise sold by the operator—the landlord’s position—there was no logical reason why it could not also reasonably be read to permit deduction of proceeds or fees or charges from a franchise sold to the operator. Textual evidence elsewhere in the lease agreement, while not dispositive as to the meaning of the exclusion, was in tension with the defendant landlord’s interpretation, the appellate court noted.

The trial court’s determination was further supported by substantial extrinsic evidence of the parties’ intent to permit the practice, including uncontradicted and highly credible expert testimony explaining the terms of the contract in the context of a new potentially competitive mall opening nearby. The testimony was consistent with the text of the lease, in terms of its susceptibility to the operator’s interpretation, and it reasonably explained the absence of franchise fee deductions in previous years, the court observed.

An argument by the landlord that the operator’s summary of the franchise fees it paid constituted inadequate proof of damages also was rejected. The court noted that the plaintiff’s summary—which included the amounts paid in franchise fees as well as the gross sales—was admissible as voluminous business records.

The case is No. B265076.

Attorneys: Jerald E. Gale and Lawrence J. Poteet (Ablon, Lewis, Bass & Gale) for Goldmex, Inc. John P. Byrne and Sherin Hackman (The Byrne Law Office) for Glendale I Mall Associates, LLC.

Companies: Goldmex, Inc.; Glendale I Mall Associates, LLC

Cases: FranchisingDistribution CaliforniaNews