DECAMPING FRANCHISEE leaves gym franchisors fuming

Club Physical franchisors Paul and Tina Richards claim to have been left with a rent bill and empty premises after the franchisee removed all the equipment from the gym and placed her business into receivership. Although some of the actions taken by the franchisee were apparently in breach of the franchise agreement, the franchisors were told, ‘Receivership trumps franchise agreement.’

The result, the Richards believe, is a lesson for any franchisor who believes they have a rock solid franchise agreement that will guarantee their rights as well as those of the customers?

Paul Richards has sent us the following account. It should be emphasised that this represents his opinion only.

"Driven by an overwhelming passion for health and fitness, I opened the first Club Physical gym thirty years ago with just $800 to my name. I worked long hard hours with rewarding results. My team and I built Club Physical into a well-known brand. Reading the book The E-Myth ignited our belief that we could open a second branch. Then the chain grew to its eleven current locations – ten in Auckland. 

Five years ago we began franchising some of the branches. We have an exclusive inner-CBD women’s only club, and thought that it would be a great idea to franchise this to a passionate women owner who would be able to put in that loving touch, hands-on on a daily basis. A suitable candidate was found and she eventually took over the facility on a sublease with ourselves maintaining the head lease. She signed our franchise agreement and gave her personal guarantee on various items.

But it didn’t take long for alarm bells to ring: we watched as important operating advice wasn’t taken and the owner was absent from the gym during crucial times. Training and marketing meetings were missed, bills weren’t paid and the operator became a daily concern. Her debt to us steadily rose to a large sum.

We tried guiding and encouraging her, including hiring and paying for a business coach earlier this year. Recently, two meetings made to discuss business improvement with her were missed – she gave excuses. A third time was made for 2pm Tuesday May 10th.’

The Renovations That Weren’t

‘May 10th came. At 9am, I received a call from a member complaining that she couldn’t get in for a workout and shower because the women’s gym was closed. I immediately drove to the city and discovered a roughly printed sign on the door stating, “Sorry, closed two days for renovations.”

I called the receptionist at home. She said that she had been told at the close of her shift last night, “By the way, you won’t be needed for two days because we’ll be renovating.” Our trainer was woken by a text at 2am that morning stating the same.

But there were no renovations – a far more sinister plan had taken place. When I eventually gained entry and walked up the stairs, my face dropped. Aside from a meagre scattering of torn boxes and machine frames devoid of their weight stacks, we had been left with four walls – some with tears and holes. We had also, suddenly and unexpectedly, been left with full liability for the rent as holder of the head lease. There was no equipment to serve our members. The gym had been stripped bare overnight.

The building manager later shared security footage showing a lady dressed in pink coordinating a mobile crane and ten movers as they quickly went about their plan to strip the gym. A night watchman had called the landlord, who drove in and called the police. The police ordered the gear to be taken back into the premises. However, this amounted only to a few boxes and frames – the movers had already made off with the majority of the gear prior to the landlord’s arrival.

When I got there in the morning I called the police to see if they could retrieve the other trucks full of equipment, but they advised, “Sorry, but this is now a commercial matter. You’ll need to resolve it yourself.”’

The Show Must Go On

After a couple of hours mulling over the initial shock, we quickly realised that ‘the show must go on.’ Rather than dwell on the negative, we chose to look ahead. We quickly went about sourcing new gear, and found a complete brand new cardio gym (computerised bikes, cross-trainers and treadmills) waiting in a warehouse for an operator who was unable to proceed. We had this installed within a week. We held a team meeting and our resourceful trainer gave members body weight exercises and cardio that didn’t need equipment. The stereo was made ready for classes to re-start within 48 hours.

Our team began personally calling each member to give confidence to the positive plan that was now forming. Several newsletter updates were sent over the next 14 days to keep members right up-to-date with equipment orders and services.

Then, deciding to look at the funny side, we got hold of the stop-motion CCTV footage showing the removal of the gear and made it into a ‘Charlie Chapman’ style of movie. What made it funnier was the midnight raiders made several errors during their escape including:

• Locking themselves out.
• Two guys almost coming to blows and stepping outside.
• Objects continually being placed by one mover to hold back the self-closing door, then being picked up and taken outside by another mover.
• The crane operator bumping his head on the ceiling.
• The police arriving and ordering the return of everything on the pavement.

Our goal was to generate a humorous viral email that would help bring in more business to help compensate for the huge costs we were now in for. However, although it was proving popular, the franchisee’s solicitor demanded that we remove it because it showed their client “in a bad light.” We decided to remove it because we didn’t need the extra stress at a time when we were focusing our energies on building the gym back up.’

So What Happened?

‘On May 11th, the day after we discovered the removal, we were asked to meet a receiver. We attended the meeting and were told that the franchisee had placed her company into receivership. However, it wasn’t quite straightforward. What she had apparently done was this: having set up another company to own the gym, she had evidently registered a ‘General Security Agreement’ (GSA) over it in favour of herself personally. (Editor’s note: a General Security Agreement grants a security by a company to a creditor over all of its assets and undertakings). Then she had her husband’s company do some work in the club and he also registered a GSA against her company.

Even though our franchise agreement clearly stated that this was not permitted without written approval, it was done. They then placed the original company into receivership.

We quoted the franchise agreement. I’ll never forget the reply: “Receivership trumps franchise agreement!” – as if it were a game of cards. I countered, “She also has a sublease and personal guarantees.” The receiver answered, “I can make that disappear in a day.”

The receiver has since offered to sell the fit-out back to us! We didn’t buy their haul back, and within seven days we had committed to $110,000 of new equipment. Our goal is to use this challenge as a learning curve and to make Club Physical Women, in the Auckland CBD twice as good as before.

This has been a real lesson for us. Despite our best endeavours to assist a franchisee, and despite having a properly drawn-up franchise agreement, we have been left with a rent bill and empty premises. Our experience should be a warning to all franchisors who guarantee a lease for another, or who maintain a head lease after subleasing."

We welcome links from other websites to this article. Please note that this article is copyright © Eden Exchange NZ Holdings Limited, Franchise New Zealand magazine and Franchise New Zealand On Line. While it may be downloaded for personal use, no part may be reproduced on any other website, in electronic or printed form or in any other form whatsoever.