Royalty holidays a no-go after legal battle over gym franchise

A High Court case between two New Zealand gym owners has been settled after a franchisor renamed and re-branded three gyms.

The owner of the gym franchise Club Physical, Paul Richards, was shocked to receive an email “totally out of the blue” from a franchisee saying three of his ten franchised gyms were being renamed.

The franchisee, Stuart Holder, pulled out of the Club Physical franchise after the end of an initial two-year franchise royalty holiday and re-branded the three gyms as “Jolt Fitness”, putting in place new signs, classes and staff uniforms.

Richards took the dispute to New Zealand’s High Court, claiming Holder had breached franchise agreements that had years to run.

However, Holder claimed he had received little support from Club Physical under the franchise agreement and that some of the gym’s advertising was in poor taste.

Justice Helen Winkelmann granted an injunction requiring Holder to close the gyms immediately but then allowed Jolt Fitness to keep trading while the two parties negotiated an amicable handover.

Richards takes over the leases today and will reinstate the gyms as Club Physical, with original branding and classes over the Easter break.

Richards told SmartCompany Holder claimed he was not given any support and wasn’t helped, but he showed the court “abundant proof” of daily communication assisting Holder.

“We would never advise any franchisor to sell any more than one franchise to one person,” says Holder.

He has been burnt by the experience and has taken the three gyms back under company ownership after spending eight weeks in court and “at least” $NZ100,000 on legal fees.

Richards says gym members organised protests outside the court and he received a lot of support from the community in getting his gyms back. However, he is worried the true cost of the legal battle will extend beyond the lawyers’ fees.

“Anybody who wanted to buy a franchise would surely think twice about dealing with us, when you talk about the cost, it could have cost us hundreds of thousands of dollars,” he says.

However, Richards says the gyms may have benefited in terms of free publicity and he is now a convert to social networks after using them to fight back against Holder.

“I used to hate Facebook because it is a deterrent to exercise, but now my attitude has changed totally,” he says.

“I have used it heaps over the last few weeks and it was an amazing communicator, in times of trouble you can communicate with a lot of people fast.”

Jason Gehrke, director of the Franchise Advisory Centre, told SmartCompany the New Zealand case shows it is dangerous to grant royalty holidays to franchisees.

“[Holder] was facing the prospect of having to pay royalties and so decided to exit, the terms of the franchise agreement would have been very clear,” he says.

“There’s a value attached to franchise royalties and, effectively, it is a fee for service; if a franchisee is complaining about support, but is not paying for support, there is a problem there.”

Gehrke says the lesson for franchisors is don’t give a royalty holiday to franchisees.

“For franchisees, make sure you get detailed advice as to the consequence of abandonment and re-branding before considering that course of action,” he says.

Stephen Giles, partner at law firm Norton Rose, says the outcome of the case would be likely to be the same in the Australian courts.

“Unfortunately, it seems like the franchisee involved somehow misunderstood the nature of the franchise relationship and that franchise agreements are binding contracts which courts will enforce,” he says.

Giles says Holder probably thought he had valid reasons for doing what he was doing, but instead of trying to resolve those issues with Richards and Club Physical he took matters into his own hands.

“Unfortunately you do sometimes see that in franchising,” Giles says.

“Franchisees can have issues that they should resolve constructively and collaboratively and instead in a flurry of emotion they act a bit precipitously and without regard for the legalities of the franchise relationship.”