Tim Hortons would not extend the franchise agreement for one of Dave Mayer’s three restaurants in Rochester, N.Y., last month, apparently because the restaurant wasn’t remodeled in time, according to the operator's contract.
Yet, in negotiations between the company and its franchisee over the location’s future, the coffee-and-doughnut chain had an unusual request.
Mayer heads the U.S. chapter of the Great White North Franchisee Association, the independent group of the chain’s operators. The U.S. association has sued Tim Hortons over the brand’s charges for things like food and paper, which the company controls.
Tim Hortons wanted the association to drop its lawsuit before it would grant Mayer more time to remodel the stores. “THUSA is willing to further extend the deadline for the remodel of TH# 9388 to October 31, 2020 for the exterior and December 31, 2020 for the interior,” Robin Schafer, a franchising and real estate attorney for Tim Hortons USA, said in a letter dated Sept. 15 to one of Mayer’s attorneys, a copy of which was provided to Restaurant Business. “In exchange for such extension, your client must dismiss the case entitled Great White North Franchisee Association – USA, Inc., v. Tim Hortons USA Inc., et al. (the lawsuit) within fifteen (15) days of the date hereof.
“Currently, the lawsuit is an impediment to THUSA and your client moving forward in an amicable manner and as such is a requirement for continued extensions and other concessions by THUSA.”
The store has since been closed. Rather than have the association drop the lawsuit, Mayer agreed to step down from the association and sell the restaurants back to the company after 17 years as a franchisee. It’s not what he wants. “I don’t want to sell,” he said. “I want to stay in. I just wanted to correct the situation.”
This is not the first time that Tim Hortons has tried to oust an operator prominent within its franchisee association. In 2018, the company ousted the president of the Canadian chapter of the association amid a dispute there, arguing that he was disparaging the brand, violating the franchise agreement in the process.
In this instance, however, it appears that Tim Hortons was using its franchise agreement with a prominent member of an independent association to get the group to cease legal action—a move that shocked attorneys for the group, particularly given the blatant request in a written letter. “It’s really hambone to put it in writing,” said Jerry Marks, an attorney in Florida with the Marks Klein law firm. “It’s one thing to allude to it. It’s another to commit yourself in writing.”
In an emailed statement, Tim Hortons did not address the specific issue of the request for the association to drop the lawsuit. “We value our relationships with all franchisees and have specific requirements for renewing agreements upon expiration. These requirements are the same for all franchisees and franchisees must comply with the conditions stipulated to receive a renewal of their franchise agreement. If the conditions for renewal are not met, a franchise agreement simply expires.”
When pressed on the issue of the request to drop the lawsuit, a company spokesperson replied simply that “the franchisee in question is still a franchisee in the Tim Hortons system. He did not meet the requirements for an extension for the location in question even after we provided him an extension in order to do so. This is simply a contractural matter.”
The dispute between Tim Hortons and Mayer illustrates one of the biggest challenges in U.S. franchising. There are few regulations governing the relationship between a franchisor and a franchisee, outside of simple disclosure laws. There is almost no enforcement of franchise rules in the U.S., outside of civil actions brought by lawyers.
Franchisors are left with a lot of leeway in dictating their relationship through the franchise agreement. “The franchisor can draft the most horrible, one-sided document and make people sign it if they want to be franchisees, and then be able to dictate the law in various states, based on bad agreements,” said Adam Wasch, another Florida-based attorney with the law firm Wasch Raines, who represents the association. “There’s no overarching body” enforcing franchise rules.
The franchisee association has been locked in a legal battle with Tims over its food costs. The franchisees argue that the company takes excessive rebates from suppliers, which leads to higher charges for the franchisees, and they say that’s extended to some of their pandemic supplies. Operators say they currently have to pay $24 for a box of masks that they say they can get for $8 outside of Tims’ supply chain.
Franchisees argue this has been a reason for the brand’s U.S. struggles. The company operated 883 locations in the U.S. when Burger King merged with Tim Hortons in 2014 to create Restaurant Brands International (RBI). As of the end of 2019, that number had declined to 715, according to data from Restaurant Business sister company Technomic.
The issue of Tim Hortons’ charges is a big one, both for the brand and for RBI as a whole. Some 60% of RBI’s revenues comes from Tims (the company also operates Popeyes Louisiana Kitchen). Much of those revenues come from Tim Hortons’ supply chain sales to franchisees.
Mayer himself has been involved with Tim Hortons for 23 years. He first worked with the company to help operators improve their profitability before he opted to become a franchisee himself. Mayer opened his first unit in 2003 in Rochester. He opened another in 2005 and a third in 2010.
Tim Hortons told Mayer that he needed to remodel two of his locations, based on the franchise agreement’s remodel requirements.
According to the initial letter to Mayer, the operator’s agreement for one of his locations expired on May 31. He was given until Sept. 22 to remodel the location to earn an extension of the agreement. Mayer said he felt that his restaurants generated enough cash flow to fund the full remodels, but lenders would only fund one repair. He said in an interview that he asked Tim Hortons to let him do a smaller, “mini” remodel now, before doing a full remodel on the second location in five years. The company balked, he said.
But Tims’ demand also came in the midst of the pandemic, at a time when many other brands were giving remodel breaks to their franchisees—including Tim Hortons in Canada, which in March suspended capital expense requirements of its franchisees there. That suspension apparently didn’t extend to Mayer. “They put me on notice in the middle of the pandemic,” he said, noting that none of the other Tims locations in the Rochester market are being remodeled. They’re all company-operated units, he said.
Mayer couldn’t have the association drop its lawsuit, but he also said the remodel deadlines the company was offering—full remodel by the end of the year—were not doable. Tim Hortons terminated his franchise agreement last month, and his store closed on Sept. 27.
Mayer is willing to sell the three stores to the company, but he said Tim Hortons is giving him a lowball offer that doesn’t value the locations at a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization)—a common practice in sales of existing restaurants. “They offered me basically peanuts,” he said.
Mayer believes Tims is “selectively enforcing the franchise agreement” because of his role as president of the association. “They’re definitely targeting me,” he said.
Marks, for his part, blasted the brand’s decision, and said attorneys would examine laws in New York, Florida (where Tim Hortons U.S. is based) and in Canada, where Tim Hortons and parent RBI are based and which has a stronger franchise law.
“My client gets up at 4:30 in the morning to open his store so people can have coffee,” Marks said. “Do they have equal dedication? I doubt it. They’d better be ready for the next salvo. It’s coming. We will do to them what they are attempting to do to our clients.”
UPDATE: This story has been updated to include further comment from Tim Hortons.