Are franchisors 'property practitioners' when assisting franchisees to sell their businesses?
For many years, the business affairs of estate agents in the property sector was regulated by the Estate Agency Affairs Act 112 of 1976 (“EEA Act”). The EEA Act failed to assist in transforming the property sector and, with this in mind, the Property Practitioners Act 22 of 2019 (“PPA”) was signed into law. However, the EEA Act has not yet been repealed as there has been no confirmation of the date of commencement of the PPA.
EEA Act
The EEA Act defines an ‘estate agent’ as any person who, for the acquisition of gain on his own account or in partnership, in any manner holds himself out as a person who, directly or indirectly advertises that he, on the instructions of or on behalf of any other person sells, purchases, lets or hires, or publicly exhibits for sale or hire, immovable property or any business undertaking, or collects or receives any moneys payable on account of a lease of immovable property or any business undertaking.
The PPA
The PPA has replaced the term “estate agent’ with “property practitioner”. Although the definitions of the terms “estate agent” in the EEA Act and “property practitioner” in the PPA are similar, the latter is much broader and covers several business activities that are not included in the EEA Act.
A “property practitioner” is defined as a natural or juristic person who or which in any manner holds himself, herself or itself out as a person who or which, for the acquisition of gain, directly or indirectly, on the instructions of or on behalf of another:
sells, purchases, manages or publicly exhibits for sale any property or business undertaking;
lets or hires or publicly exhibits for hire property or any business undertaking;
collects or receives any monies payable on account of a lease of a property or a business undertaking;
provides, procures, facilitates, secures or otherwise obtains or markets financing for or in connection with the management, sale or lease of a property or business undertaking;
and/or provides services as an intermediary or facilitator to effect the conclusion of an agreement to sell and purchase, or hire or let a property or business undertaking (except a person who does not do so in the ordinary course of business; a natural person in their personal capacity; an attorney; candidate attorney or sheriff).
The PPA has broadened the definition of “property practitioner” from that of an estate agent under the EAA Act to include directors, trustees and employees of property practitioners. On the other hand, the PPA excludes from the definition a person who does not engage in any of these activities in the ordinary course of business.
Franchisors facilitating sales of franchisees’ businesses
From time to time, franchisees in a franchise network wish to, or are compelled to, sell their businesses for financial or other reasons. Franchisors, in these circumstances, would often like to ensure that the business continues trading as a franchised outlet and will assist outgoing franchisees to find potential buyers to replace the existing franchisee and. This is not a contractual obligation of the franchisor and is done on an ad hoc basis in particular cases. Sometimes a franchisor may also assist the purchaser to raise a loan for the purpose of financing the purchase.
In these circumstances, the question arises whether the franchisor will be deemed to be an “estate agent” under the EEA Act, or a “property practitioner” under the PPA, and therefore subject to the regulatory requirements of those statutes and to the jurisdiction of the regulatory bodies governing the estate agents’/property practitioners’ professions.
A franchisor who assists a franchisee to find a purchaser for its business may indeed exhibit the business for sale and may be facilitating the sale, two of the activities falling within both the definition of an “estate agent” and a “property practitioner”. In addition, a franchisor who assists a prospective purchaser to raise finance to fund the purchase price may be engaging in one of the activities covered by the definition of a “property practitioner”. However, this alone does not mean that the franchisor will fall under the legislation. Two other important elements need to be satisfied:
the franchisor must engage in the activity in question for the acquisition of gain; and
the franchisor must hold him/her/itself out as a person who engages in the activity concerned.
Where franchisors assist franchisees to find purchasers for their businesses, this is almost invariably on an ad hoc basis, and simply to ensure that the new franchisee is suitable and able to continue to run the business. It may be argued that they are doing so “for gain”, in as much as they have the expectation of earning an initial and ongoing franchise fees from the incoming franchisee (the purchaser of the business). But seldom, if ever, do they receive a commission or fee directly as a result of facilitating the sale or for. It seems illogical to suggest that, where a franchisor does not request or obtain a financial reward directly in consideration for facilitating the sale of the business, that it facilitates the sale “for gain”.
In regard to the requirement that the person concerned must “hold itself out” as a person who for gain, engages in any of the activities listed in the legislation, that phrase is generally accepted as meaning “advertises” through print media, broadcast media, the internet, or other means. Engaging in the activity concerned, even for gain, is not enough; in order to meet the definition of an “estate agent” in the EEA Act, or a “property practitioner” in terms of the PPA, must advertise the fact that it does so. Most franchisors in fact, do not do so, as it is not their core business, and to the extent that they may facilitate a sale of a franchisee’s business it is on an occasional basis.
The PPA also excludes from the definition of a “property practitioner” a person who engages in the one of the listed but does not do so “in the ordinary course of business”. The EEA does not contain this exclusion. Where facilitating sales of franchised businesses does not form part of a franchisor’s core business, and it only becomes engaged in doing so on an ad hoc basis, it would be able to argue that the exclusion applies to it.
Whilst the PPA has not yet come into effect, it is necessary for all persons involved in the business of selling, purchasing, letting or hiring or advertising business undertakings to be aware of its provisions. Once the PPA comes into effect, every person that falls within the definition of a “property practitioner” will be required to comply with its requirements and those of the PPRA. For now, the provisions of the EEA Act still apply to those persons involved in the sale, purchase, letting or hiring of immovable property. In the majority of cases, a franchisor who merely assists a franchisee to find a purchaser for their businesses, or assists a prospective franchisee to obtain funding to finance the acquisition of a business, will not fall under the auspices of the EEA Act or PPA.