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Franchise Agreement

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Sectors: Leisure and Entertainment
Governing Law: Kansas, View Kansas State Laws
Effective Date: July 25, 1996
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CANDLEWOOD HOTEL COMPANY, L.L.C.


FRANCHISE AGREEMENT


CANDLEWOOD HOTEL COMPANY, L.L.C. 2
FRANCHISE AGREEMENT


TABLE OF CONTENTS


Page No.


Recitals ...................................................................................................... 1


Article 1 Acknowledgments and Representations............................................................ 2 Article 2 Grant of Franchise............................................................................. 3 Article 3 Term and Renewal............................................................................... 4 Article 4 Fees and Royalties............................................................................. 5 Article 5 Hotel Construction and Opening................................................................. 7 Article 6 Duties of CHC.................................................................................. 10 Article 7 General Duties of Franchisee................................................................... 12 Article 8 Quality Control and Supervision................................................................ 16 Article 9 Advertising.................................................................................... 18 Article 10 Financial Reporting............................................................................ 20 Article 11 Proprietary Marks and Trade Secrets; Competition............................................... 22 Article 12 Insurance and Indemnity........................................................................ 26 Article 13 Transfer of Interest or Management............................................................. 28 Article 14 Default and Termination........................................................................ 33 Article 15 Obligations upon Termination................................................................... 35 Article 16 Additional Covenants........................................................................... 37 Article 17 Approvals and Waivers.......................................................................... 38 Article 18 Notices........................................................................................ 39 Article 19 Alternative Dispute Resolution................................................................. 39 Article 20 Entire Agreement............................................................................... 41 Article 21 Construction and Modification.................................................................. 42 Article 22 Execution of Agreement......................................................................... 43
Guaranty....................................................................................................... 45 Exhibit A Approved Location ............................................................................. A-1 Exhibit B Owners of Franchisee .......................................................................... B-1 Exhibit C Covenant Agreement ............................................................................ C-1 3
CANDLEWOOD HOTEL COMPANY, L.L.C.


FRANCHISE AGREEMENT


THIS FRANCHISE AGREEMENT (the or this "Agreement") made and entered into at Wichita, Kansas this 25th day of July, 1996, by and between CANDLEWOOD HOTEL COMPANY, L.L.C., a Delaware limited liability company (hereinafter referred to as "CHC"), and Studio West Hotel Development Company, L.L.C. (hereinafter referred to as "Franchisee"), whose principal business address is 101 Larkspur Land, Suite 318, Larkspur, California 94939.


RECITALS


A. CHC has developed and owns a concept and distinctive system for the design, decor, establishment, operation, and image of hotels under the name "Candlewood Hotel" and "Candlewood/A Studio Hotel" (such names and any other trade names, service marks, trademarks, logos, emblems, or other indication of origin as are now or hereafter designated by CHC as part of such system are hereinafter referred to as the "Proprietary Marks") utilizing certain Trade Secrets (as defined in Section 11. 4 below) in connection with providing economy extended-stay lodging accommodations (such system, as it may be modified or supplemented by CHC from time to time, is hereinafter referred to as the "System").


B. Franchisee desires to establish and operate a Candlewood Hotel under the System and wishes to obtain a franchise from CHC for that purpose.


C. Franchisee recognizes the benefits to be derived from being identified with and licensed to use the System and Franchisee understands and acknowledges the importance of operating the hotel franchised hereunder in strict conformity with CHC's standards and specifications in order to enhance public acceptance of, and demand for, all Candlewood Hotels (hereinafter, the "System Hotels").


D. CHC is relying upon the business skill, financial capacity, and character of Franchisee and its principals, and the guarantee by the principals of Franchisee's obligations, if applicable, as attached to this Agreement.


NOW, THEREFORE, in consideration of the foregoing and of the promises contained herein, the parties agree as follows:


- 1 - 4 ARTICLE 1. ACKNOWLEDGMENTS AND REPRESENTATIONS.


Franchisee acknowledges and represents to CHC, in order to induce CHC to enter this Agreement, as follows:


A. Franchisee has read this Agreement and CHC's franchise
disclosure document and understands and accepts the terms, conditions,
and covenants contained in this Agreement as being reasonably necessary
to maintain CHC's standards of quality and service and the uniformity
of those standards at each System Hotel in order to protect and
preserve the goodwill of the Proprietary Marks.


B. Franchisee has conducted an independent investigation of
the business contemplated by this Agreement. Franchisee recognizes that
the nature of the business conducted by CHC may evolve and change over
time; that an investment in a Candlewood Hotel involves business risks
which have been considered by Franchisee; and that the success of the
venture depends primarily upon Franchisee's business ability and
efforts.


C. Franchisee has not received or relied upon any guarantee,
expressed or implied, about the revenues, profits, or success of the
business venture contemplated by this Agreement.


D. No representations have been made by CHC, or by its
members, managers, officers, employees, directors, and/or agents, and
Franchisee has not relied on any representations, that are contrary to
or not contained in the statements made in the franchise disclosure
document heretofore received by Franchisee or the terms contained in
this Agreement.


E. CHC has made no representations or warranties and has
further disclaimed any warranties with regard to whether any of the
Proprietary Marks are protectable or registerable and with regard to
whether any of the Proprietary Marks infringe upon the rights of
others.


F. In all of their dealings with Franchisee, the members,
managers, officers, employees, directors, and/or agents of CHC act only
in a representative capacity, not in an individual capacity, and that
this Agreement and all business dealings between Franchisee and such
individuals as a result of this Agreement are solely between Franchisee
and CHC.


G. The application made by Franchisee to CHC is true and
correct. Franchisee has made no incorrect statement in the application
or failed to make any


- 2 - 5
statement that would be necessary to make the statements in the
application not misleading.


ARTICLE 2. GRANT OF FRANCHISE.


2.1. Subject to the terms and conditions of this Agreement, and to the continuous compliance by Franchisee with the terms and conditions of this Agreement, CHC hereby grants to Franchisee the nonexclusive right, and Franchisee undertakes the obligation, to operate a Candlewood Hotel in accordance with CHC's standards and specifications, including the operational standards procedures and techniques as prescribed in the System standards manual of CHC (as it may be modified, amended, and supplemented by CHC from time to time in its sole discretion, hereinafter, the "Manual"), and to use the System (as it may be changed, improved, and further developed by CHC from time to time) and the Proprietary Marks in connection therewith. Such franchised Candlewood Hotel shall be referred to in this Agreement as the "Hotel" or "franchised business."


2.2. Franchisee shall operate the Hotel at, and only at, the street address set forth on Exhibit A hereto (hereinafter, the "Approved Location"), and the Hotel shall have the number of guest rooms specified on Exhibit A. Franchisee agrees that CHC and CHC's members and the subsidiaries and affiliates, shareholders, and owners of CHC and its members including without limitation Doubletree Corporation, a Delaware corporation, and its affiliates (hereinafter, the "Affiliated Companies") are not restricted from using the System or engaging in or licensing any business activity including System Hotels or other hotels at any other location.


2.3. Franchisee agrees that (a) this franchise relates solely to the Approved Location, and (b) this Agreement does not entitle Franchisee to any protected territory, territorial rights, or exclusivity. Franchisee shall not expand or change the number of guest rooms in the Hotel without the prior written consent of CHC.


2.4. Franchisee further agrees that CHC and the Affiliated Companies have and retain the right to develop, acquire, participate in, and/or operate and license others to develop, acquire, participate in, and/or operate hotels, lodging facilities, or other business operations of any type whatsoever, including, without limitation, hotels using any of the Proprietary Marks or any other trade names including, but not limited to, any of the following specific trade names: Doubletree, Doubletree Guest Suites, Club Hotels by Doubletree, Residence Inn by Marriott and The Residence Inn, at any location, and that such business operations may compete with and adversely affect the operation of the franchised business. Franchisee agrees that the Affiliated Companies may exercise such rights from time to time without notice to Franchisee. Franchisee covenants that it shall not take any action, including a cause of action in a court of law or equity, which may interfere with the exercise of such rights by any of the Affiliated Companies.


- 3 - 6
2.5. The license granted hereby to use the Proprietary Marks is nonexclusive, and Franchisee agrees that such Proprietary Marks are and shall remain the property of CHC and shall not be contested as to ownership or validity by Franchisee. Franchisee understands and agrees that the grant of the license to use the marks is conditioned upon Franchisee's agreement that: (a) the Proprietary Marks shall be used only in connection with the franchised business and only in the manner authorized by CHC; (b) Franchisee will not use the Proprietary Marks as part of its corporate or other legal name, will identify itself as a franchisee, and will comply with all fictitious name and other statutes in connection with its use of the Proprietary Marks; (c) Franchisee will cooperate with CHC in protecting and defending the Proprietary Marks; and (d) Franchisee will comply with CHC's designations of additions, deletions, and changes in the Proprietary Marks.


ARTICLE 3. TERM AND RENEWAL.


3.1. Unless sooner terminated or modified as hereinafter provided, the term of this Franchise shall be 20 years from the date of this Agreement.


3.2. Franchisee is granted the option to renew this Agreement for two additional consecutive terms of ten years, provided Franchisee complies with all of the following conditions prior to each such renewal:


A. Franchisee shall not then be in default of any provision of
this Agreement, any amendment hereof, or successor hereto, or any other
agreement between Franchisee and CHC or any of the Affiliated
Companies, and shall have substantially complied with all of the terms
and conditions of such agreements during the initial and/or any prior
renewal terms thereof.


B. Franchisee shall have satisfied all monetary obligations
owed by Franchisee to CHC and any of the Affiliated Companies, and
shall have timely met those obligations throughout the term of this
Agreement.


C. Franchisee shall submit a renewal application to CHC not
less than 24 months nor more than 36 months prior to the end of the
initial term and shall pay with its renewal application a renewal fee
of one-half of the then-current franchise application fee being charged
by CHC for new development, computed on a per room basis.


D. Not less than 12 months prior to the end of the initial
term, Franchisee shall execute CHC's then-current form of commitment
agreement for renewal franchise agreement, which may require, among
other things, that Franchisee's general manager and other employees
comply with CHC's then-current training requirements and that
Franchisee upgrade, at Franchisee's expense, the Hotel to conform to
the then-current


- 4 - 7
standards and specifications of CHC, including, without limitation,
such structural changes, remodeling, and redecoration and such
modifications to existing improvements as may be necessary to do so.


E. Franchisee shall execute a general release, in a form
prescribed by CHC, of any and all claims against CHC and all of the
Affiliated Companies, and each of their members, owners, shareholders,
managers, directors, officers, agents, and/or employees; provided,
however, that all rights enjoyed by the Franchisee and any causes of
action arising in its favor from the provisions of any applicable
franchise laws and regulations shall remain in force; it being the
intent of this proviso that any non-waiver provisions of such laws be
satisfied.


Upon expiration of the initial term of this Agreement and provided Franchisee has met the foregoing conditions and has complied with the upgrading and other requirements specified in the commitment agreement, CHC shall issue to Franchisee, CHC's then-current franchise agreement for a ten-year renewal term. The then-current franchise agreement shall supersede in all respects this Agreement, and the terms may differ from the terms of this Agreement including, without limitation, higher royalty and marketing fees; provided, however, that the renewal fee paid pursuant to Section 3.2.C above shall be in lieu of any initial franchise fee provided for in the then-current franchise agreement of CHC.


ARTICLE 4. FEES AND ROYALTIES.


4.1. In consideration of the rights and franchise granted herein, Franchisee shall pay to CHC each of the following:


A. At the earlier of the execution and delivery of a franchise
application or the execution and delivery of this Agreement by
Franchisee, an initial franchise fee equal to the greater of (i)
$40,000 or (ii) $400 times the number of rooms of the Hotel as
specified on Exhibit A hereto. Franchisee acknowledges and agrees that
such fee has been fully earned and is nonrefundable in consideration of
expenses incurred, rights granted, services rendered, and other
valuable consideration, the receipt and sufficiency of which is
acknowledged by Franchisee.


B. Beginning during the Fiscal Period (as defined in Section
10.1 below) immediately following the opening of the tenth System
Hotel, a continuing Fiscal Period royalty fee of 4% of Franchisee's
Room Revenues (as defined in Section 4.3 below) at the Hotel for the
next 26 Fiscal Periods thereafter, and following such 26 Fiscal
Periods, the continuing Fiscal Period royalty fee shall be 5% of
Franchisee's Room Revenues during the remaining term of this Agreement.


- 5 - 8
C. A contribution to the Marketing Fund (as defined in Section
9.3 below), administered by the IACHO Marketing Committee (as defined
in Section 9.3 below) for the System as provided in Section 9.3 below,
on a Fiscal Period basis of 2.5% of Franchisee's Room Revenues at the
Hotel, subject to adjustment from time to time upon a majority vote by
members of The International Association of Candlewood Hotel Owners
("IACHO"). Association members in good standing under the rules
governing the association shall be provided at least 30 days advance
notice of, and an opportunity to vote on, any proposed adjustment. A
majority vote, as required to approve any adjustment in the
contribution to the Marketing Fund, shall mean a number of votes equal
to or greater than the majority of all open and operating System
Hotels. CHC shall provide to Franchisee at least 60 days notice prior
to the effective date of any adjustment so approved. CHC further agrees
that it will not exercise the rights granted herein to require
Franchisee to contribute to a Marketing Fund as described in this
section and in section 9.3 of this Agreement, without first seeking
approval of the assessment of Marketing Fund Fees from the members of
the International Association of Candlewood Hotel Owners voting in the
manner provided in Article 9.4 of this Agreement.


4.2. All Fiscal Period payments required by Sections 4.1.B and 4.1.C shall be due to CHC and Marketing Fund, respectively, by the 15th day after the end of the fiscal Period in which such Room Revenues were received by Franchisee, and shall be submitted to CHC together with any report required under Article 10 hereof. Any payment or report not actually received by CHC on or before such date shall be deemed overdue unless postmarked at least five days prior to the date it was due. If any payment is overdue, Franchisee shall pay to CHC immediately upon demand the overdue amount together with interest on such amount from the date it was due until paid, at the lesser of 1.5% per month or the maximum rate permitted by law. Franchisee acknowledges that nothing contained in this Section shall constitute an agreement by CHC to accept such payments after the same are due or a commitment by CHC to extend credit to, or otherwise finance Franchisee's operation of, the Hotel. Franchisee acknowledges that Franchisee's failure to pay all such amounts when due shall constitute grounds for termination of this Agreement, as provided in Section 14.1.E of this Agreement, notwithstanding the provisions of this Section . The entitlement to such late charge shall be in addition to any other remedies CHC may have.


4.3. As used in this Agreement, "Room Revenues" shall mean all revenues attributable to or payable for the use, occupancy, or rental of rooms at the Hotel, including barter and credit transactions (before commissions and discounts for credit cards), whether or not collected, proceeds from any business interruption insurance or other loss of income insurance applicable to loss of revenues due to the non-availability of guest rooms, and proceeds for guaranteed no- show revenue which is collected, but excluding sales taxes, room taxes, or other taxes collected by Franchisee from customers for transmittal to appropriate taxing authorities. "Room Revenues" shall be accounted for in accordance with the Uniform System of Accounts for Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association of New York City,


- 6 - 9 Inc., except as otherwise provided in the accounting procedures set forth in the Manual; subject, however, to the right of CHC to designate any subsequent edition or to designate a reasonable alternative accounting system if, in CHC's judgment, the 1986 edition is no longer authoritative or its use otherwise is not advisable under then current hotel accounting practice. In no event shall any charges to guests attributable to items and services which are required by the System to be included within the rates for lodging accommodations be excluded or deducted in determining Room Revenues. Franchisee shall not sacrifice Room Revenues to further any other business activity.


ARTICLE 5. HOTEL CONSTRUCTION AND OPENING.


5.1. Prior to commencing construction of the Hotel under this Agreement, Franchisee shall have completed or satisfied all of the following:


A. If Franchisee is obtaining the site for the Hotel by lease
or installment land contract, Franchisee shall submit to CHC with a
request for approval, prior to execution by Franchisee, the lease or
installment land contract for the proposed site, which must not contain
any provision that is inconsistent with or interferes with the
performance of any provision of this Agreement (which lease or
installment land contract must include provisions (i) authorizing CHC
to enter the premises and make any modifications necessary to protect
the Proprietary Marks, (ii) granting to CHC the right (but not the
duty) to assume the lease or installment land contract if Franchisee is
in default under its terms and provisions and/or if this Agreement
expires or is terminated, (iii) requiring concurrent notice from lessor
or vendor to CHC of any default or termination, and (iv) in the case of
a lease, providing for a term of at least 20 years including option
periods in favor of Franchisee), which lease or installment land
contract, when approved by CHC, shall not thereafter be materially
modified without the prior written consent of CHC. Under no
circumstances shall CHC have any obligation or liability under such
lease or installment land contract.


B. Submit to CHC with a request for approval, prior to
preparation of design development documents for the building, a site
layout showing (i) the dimensions of the site at the Approved Location;
(ii) the location of the site in relation to streets and other
thoroughfares and adjoining properties; (iii) placement of the Hotel on
the site; (iv) proposed drives, parking, and service areas; and (v)
such other information as may be reasonably required by CHC, which site
layout, when approved by CHC, shall not thereafter be materially
modified without the prior written consent of CHC.


C. Submit to CHC with a request for approval, after the site
layout for the Hotel has been approved by CHC, complete design
development documents for the building prepared by a registered
architect or engineer in compliance with all applicable


- 7 - 10
laws, regulations, and ordinances which design development documents,
when approved by CHC, shall not thereafter be materially modified
without the prior written consent of CHC.


D. Submit to CHC with a request for approval, after the design
development documents for the buildings have been approved by CHC,
final building plans and specifications prepared by a registered
architect or engineer in compliance with all applicable laws,
regulations, and ordinances which plans and specifications, when
approved by CHC, shall not thereafter be materially modified without
the prior written consent of CHC.


E. Provide to CHC satisfactory evidence that all permits,
licenses, and certifications required for the lawful construction and
operation of the proposed Hotel, including, without limitation, all
applicable building permits, zoning access, sign and fire requirements,
have been obtained.


F. Provide to CHC insurance certificates satisfying the
applicable requirements set forth in Article 12 of this Agreement.


G. Provide to CHC evidence that Franchisee possesses or has
obtained adequate financing for constructing, furnishing, and operating
the Hotel.


H. Such other information as CHC may reasonably request.


5.2. Franchisee shall commence construction of the Hotel before the date 120 days after the date of this Agreement. Franchisee may, upon payment to CHC of an extension fee of $1,000 per extension, obtain up to four 30-day extensions of the date upon which Franchisee was to commence construction of the Hotel. Any further extensions shall be granted only in CHC's sole discretion and upon payment of such additional extension fees as CHC deems appropriate in its sole discretion. Commencement of construction shall be deemed to have occurred on the date that grading, excavation, or similar site preparation begins at the Approved Location. Franchisee shall provide written notice to CHC of the date of commencement of construction within ten days after it occurs.


5.3. Within three months after the commencement of construction, Franchisee shall submit to CHC with a request for approval a final interior design plan, including standards and specifications for furnishings, fixtures, and equipment, prepared by a qualified interior designer, which interior design plan, when approved by CHC, shall not be materially modified without the prior written consent of CHC. As used in Sections 5.1.B, 5.1.C, 5.1.D, and this Section 5.3, the term "materially modified" shall mean any modification which would (a) change the size or dimensions of any public areas, guest rooms, or amenities of the Hotel, (b) adversely affect


- 8 - 11 the appearance or design of any portion of the Hotel or the quality of the materials used therein, or (c) constitute a departure from the concept or standards of the System.


5.4. Franchisee shall diligently and continuously prosecute the construction, furnishing, and equipping of the Hotel (including its acquisition and installation of all fixtures, equipment, furnishings, furniture, signs, supplies, and other items necessary for completion and opening of the Hotel) in accordance with the plans previously approved by CHC and in accordance with the Manual, but in any event the construction, furnishing, and equipping of the Hotel shall be completed within
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