Real Estate Case Serves as a Reminder About Adherence to the Terms of a Franchise Agreement—Until a Court Permits Otherwise

23 March 2023 Publication
Author(s): James M. Guenthner Peter Loh

In Integrity Real Estate Consultants v. Re/Max of New York, Inc., a franchisee, Integrity Real Estate Consultants (“Integrity”), sued a real estate service provider franchisor, Re/Max of New York, Inc. (“Re/Max”), in New York state court. Integrity alleged Re/Max breached the parties’ franchise agreement when Re/Max attempted to terminate the agreement before its expiration. As part of that lawsuit, the court entered a temporary restraining order and preliminary injunction that prohibited Re/Max from terminating the franchise agreement in the interim.

Re/Max countersued for breach of the agreement as well, seeking, among other things, unpaid franchise fees and attorneys’ fees pursuant to the agreement. Re/Max contended that it only sought to terminate the agreement because Integrity had already violated the material terms of the agreement previously when Integrity relocated to an unauthorized location. Because they were guarantors on the agreement, Re/Max also brought a third-party action against the owners of Integrity for that alleged breach.

The third-party defendants in that new action counterclaimed against Re/Max as well, alleging that Re/Max breached the agreement by removing Integrity from Re/Max’s advertising and website.

During a bench trial, the parties stipulated that Integrity no longer appeared on Re/Max’s regional website after the temporary restraining order and preliminary injunction had been issued. Integrity and the owners also showed that Integrity did not appear in Re/Max’s print advertisements in that same timeframe. Integrity and the owners also testified that they refused to renew the franchise or pay franchise fees and also closed their office location following those events. The trial court found for Re/Max on all issues and granted Re/Max the past-due franchise fees and attorneys’ fees requested.

Integrity and its owners appealed. The appeals court considered only two points of appeal. First, Integrity and the owners argued that they were not liable for unpaid franchise fees or attorneys’ fees because Re/Max materially breached the franchise agreement by cutting off their advertising. Second, they also argued that the conduct following the temporary restraining order and preliminary injunction violated the franchise agreement and the restraining order and injunction, warranting both civil contempt and the payment of Integrity’s and the owners’ attorneys’ fees.

The court agreed that Re/Max should have continued performing under the franchise agreement during the pendency of the temporary restraining order and preliminary injunction and that it breached that agreement when it withheld Integrity from its advertising. Thus, Integrity’s supposed breaches after that point were excused, precluding Re/Max’s recovery of unpaid franchise fees from that period. On that basis and construing the attorneys’ fees provision in the franchise agreement strictly, the appellate court also held in favor of Integrity on the request to deny Re/Max its attorneys’ fees because the provision required attorneys’ fees to accrue “as a result of” Integrity’s “failure . . . to comply with [the] Agreement,” such that Re/Max had to “enforce[] . . . the terms of [the] Agreement.” Because Re/Max contributed to the breaches and lost on its claim for franchise fees, the appellate court held that attorneys’ fees were not payable to Re/Max under the agreement’s attorneys’ fees provision.

Further, the appellate court disagreed with Integrity and its owners and upheld the trial court’s decision to not hold Re/Max in contempt for exclusion of Integrity from print advertising. The court found that the rules around civil contempt are strict and require violation of a unequivocal court mandate concerning the conduct at issue. No such mandate existed about Re/Max continuing to include Integrity in Re/Max’s advertising. Consequently, though it may have violated the franchise agreement, Re/Max’s conduct did not rise to the level necessary to warrant contempt.

This case is instructive because it reminds parties to franchise agreements to adhere closely to the terms of those franchise agreements until a court permits otherwise. This adherence includes refraining from failing to perform on a material term of a contract during a temporary restraining order or preliminary injunction. Otherwise, a party may find themselves in violation of a court order and/or in breach of contract and fail to recover a substantial part of their claims for relief.

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