Jack in the Box franchisees on Monday filed a complaint with California regulators alleging they are potentially in danger of losing their leases because of a new way the San Diego-based burger chain has restructured its real-estate portfolio.
The National Jack in the Box Franchisee Association, which called for the removal of CEO Leonard Comma in early October after a vote of no confidence, filed the complaint with the California Department of Business Oversight. The state agency governs the offer and sale of franchises in California.
In the complaint, the association, which represents 95 franchise owners who operate about 2,000 of Jack in the Box’s more than 2,200 restaurants, said the chain is altering how the company handles 1,800 master-lease agreements with landlords. Jack in the Box sub-leases those properties to franchise owners.
But on Oct. 8, Jack in the Box asked the property owners to transfer their lease agreements from Jack in the Box Inc. into a newly formed subsidiary, Jack in the Box Properties LLC, according to a letter obtained by the franchisee group.
In their complaint, the franchisee group said Jack in the Box gave landlords the option to re-assign their leases to the new subsidiary. However, if the property owners opt-out, they were warned “that there may be no assets or revenues to pay their rents,” the association said, citing the Oct. 8 letter.
Jack in the Box, which reported fourth-quarter earnings after the market closed Monday, declined to comment about the franchisee complaint and the Oct. 8 letter.
For the fourth quarter ended Sept. 30, Jack in the Box reported a 0.5-percent increase in systemwide same-store sales. Total revenue for the quarter declined to $177.5 million compared to $232.1 million for the same quarter last year. Net profit of $16.3 million, or 68 cents per share, decreased from $30 million, or $1.05 per share, from the same quarter last year. The reduction was due in part to discontinued operations tied to the sale of Qdoba.
The franchisee group, citing the Oct. 8 letter, said the new real estate restructuring is being done to increase the chain’s credit worthiness and to secure new financing.
Association lawyer Dan Watkins said landlords who don’t switch to the new company might be billing a “shell company” that Jack in the Box is no longer using to collect rental payments. He said landlords could also consider Jack in the Box’s real estate restructuring a breach of contract. That could lead to a landlord terminating a lease because they are dealing with a new company no longer directly backed by Jack in the Box Inc.
The franchisee group said it is asking state’s Department of Business Oversight to review the case, as the agency is charged with oversight of franchisee-franchisor agreements.
“The intent behind filing this complaint is to protect the tenant rights of franchisees who have invested their life savings in these buildings,” Watkins said in a statement.
Update November 19, 2018: This article has been updated with fourth-quarter earnings from Jack in the Box.
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