FDD Item 22 Explained: The Contracts You're Signing and How to Review Them

The FDD contains disclosures about the franchise system. The franchise agreement — one of the documents listed in Item 22 — contains the actual binding commitments. Everything described in Items 1-21 is disclosure; Items 22 and 23 mark the transition to execution. The franchise agreement is often 40-80 pages of dense legal language that supersedes, limits, or expands on many of the disclosures in the preceding items.

The Standard Document Package

Most franchise agreement packages include some combination of these documents:

• The franchise agreement: The master contract governing the entire relationship — your obligations, the franchisor's obligations, fee structures, territory rights, termination provisions, dispute resolution, and non-compete terms. Every disclosure in the preceding FDD items should be cross-verified against the franchise agreement text. Where disclosures and agreement language conflict, the agreement language controls.
• Area development or multi-unit development agreement: If you're buying development rights for multiple units, this is a separate agreement specifying the development schedule, territory, fees, and consequences for missing milestones. Development agreements run in parallel with individual franchise agreements for each unit — you have obligations under both simultaneously.
• Personal guarantee: The individual owner's guarantee of the business entity's obligations. Review the scope carefully: a guarantee limited to the franchise agreement is different from a guarantee that extends to all "present and future obligations, including any agreements entered into in connection with the franchise." The second formulation is significantly broader.
• Technology or software license agreement: A separate agreement governing your use of the franchisor's proprietary technology platform. May include separate subscription fees, terms of service that limit your use of data generated by your business, and terms governing what happens to your customer data if the agreement terminates.
• Lease or sublease agreement: If the franchisor acts as master tenant and subleases locations to franchisees, this document governs the real estate portion of the relationship. Franchisee subleases typically include assignment rights back to the franchisor if the franchise agreement terminates — meaning the franchisor can step into your lease and either continue operating or assign it to a successor franchisee.
• Confidentiality and non-disclosure agreement: May be a standalone document or incorporated into the franchise agreement. Governs your obligations to keep the franchisor's trade secrets and proprietary information confidential both during and after the franchise relationship.

State Addenda: When You're in a Registration State

Fourteen states have franchise registration laws that require franchisors to modify their standard agreements for franchisees in those states. If you're in California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, or Wisconsin — your FDD package includes a state-specific addendum that modifies the base franchise agreement.

These addenda often provide franchisee-favorable protections beyond what the base agreement offers:

• California: Limits post-termination non-competes to specific circumstances; requires California law and venue for disputes; modifies termination notice requirements
• Minnesota: Franchise agreement terminations must have good cause; non-competition restrictions must be reasonable; Minnesota law governs
• Maryland: Requires Maryland registration approval before the FDD can be offered; provides 10-day cooling-off period after signing
• Washington: Limits franchisor's right to unreasonably withhold consent to transfer; requires the agreement to be fair and equitable at renewal

If you're in a registration state, review both the base franchise agreement AND the state addendum together — they operate as a combined set of terms, with the addendum modifying (and in some cases substantially improving) the base agreement for your jurisdiction.

How to Approach the Legal Review

Every document listed in Item 22 should be reviewed by a qualified franchise attorney before signing — not a general business attorney, but someone who specifically practices franchise law. The franchise attorney's review should focus on:

• Termination and cure rights: What triggers termination, what is the cure period, and what recourse do you have if you believe a termination is wrongful?
• Non-compete scope and enforceability in your state: The post-termination non-compete in the franchise agreement may be unenforceable or significantly limited in your state — California essentially won't enforce non-competes; most other states enforce reasonable restrictions. Know what the restriction actually means for you.
• Dispute resolution forum and governing law: The franchise agreement almost certainly requires disputes to be resolved in the franchisor's home state, under that state's law. For a franchisee in Florida disputing with a franchisor headquartered in Utah, this means traveling to Utah for arbitration. Your attorney can advise whether the forum selection clause can be challenged in your state.
• Indemnification provisions: Franchise agreements often require the franchisee to indemnify the franchisor for virtually any claim that arises from the franchisee's operation — including claims from employees, customers, and suppliers. The scope of indemnification is negotiated in some systems; verify whether there are any limits on your indemnification exposure.

The Technology License Agreement That Holds Your Customer Data Hostage

Buried in Item 22's contract list is increasingly a standalone technology or software license agreement — separate from the franchise agreement and governed by its own terms. This document governs your use of the franchisor's POS system, customer management platform, online ordering system, and mobile app. The critical clause most buyers skip: data ownership and portability. Most technology license agreements specify that all data generated through the franchisor's platform — customer contact information, purchase history, marketing preferences, loyalty program data — is owned by the franchisor, not by you. When your franchise agreement ends (whether by expiration, transfer, or termination), you lose access to every customer relationship you built over 10 years. You can't export your customer email list, can't download purchase history for your accountant's valuation analysis, and can't transfer loyalty program members to a new business. For a franchise with 5,000–15,000 active customers, that customer database has a valuation of $50,000–$150,000 based on customer acquisition cost alone — value you created through your operational investment that evaporates at termination. The negotiation ask: a data portability clause requiring the franchisor to export your customer contact data in standard format within 30 days of agreement termination, and a license to use non-proprietary customer data (names, contact info, purchase amounts) in any subsequent non-competing business.

The Guaranty Agreement That Puts Your Personal Assets at Risk

Among the contracts listed in Item 22, the personal guaranty is the one that transforms franchise ownership from a limited business risk into unlimited personal exposure — and most buyers sign it without fully understanding the scope. The standard franchise personal guaranty makes you individually liable for all obligations under the franchise agreement: remaining royalties through the full term if you default, build-out completion costs if you abandon construction, lease obligations assumed by the franchisor on your behalf, indemnification claims, and legal fees the franchisor incurs in enforcing the agreement. On a 10-year franchise agreement with 6% royalties on $800,000 annual revenue, the maximum theoretical exposure under the guaranty is $480,000 in future royalties alone — before damages, attorney fees, and lease obligations. For married buyers in community property states (California, Texas, Arizona, and 6 others), the guaranty can attach to community property including your spouse's share of joint assets. The negotiation opportunity: some franchisors will accept a limited guaranty capped at a specific dollar amount (typically 1–2 years of projected royalties) or will release the guaranty after 3–5 years of compliance. This is more commonly available to experienced multi-unit operators, but first-time buyers with strong financials and experienced franchise attorneys occasionally obtain it.

The Arbitration Clause That Eliminates Your Most Powerful Legal Remedy

Nearly every franchise agreement in Item 22 includes a mandatory arbitration clause — and most buyers accept it as standard boilerplate without understanding what they're giving up. Mandatory arbitration eliminates your right to a jury trial, removes your ability to join a class action with other franchisees (most clauses include explicit class action waivers), and moves the dispute to the franchisor's home jurisdiction at your expense. The financial asymmetry is deliberate: filing for arbitration costs $10,000–$25,000 in initial fees (versus $400 to file a lawsuit), travel to the franchisor's home city adds $3,000–$8,000 per hearing, and the entire process takes 6–18 months with no public record — meaning other franchisees can't learn from your case or use your outcome as precedent. For individual disputes under $50,000, the economics of arbitration effectively make it uneconomic to pursue the claim — which is precisely why franchisors prefer it. The one area where this has shifted: several states (California, Washington, and New York) have passed laws limiting the enforceability of mandatory arbitration in franchise agreements, particularly for claims involving statutory violations or unconscionable contract terms. Your franchise attorney should advise whether your state's law modifies the arbitration clause and whether specific claims can be carved out to preserve your access to the court system.

The Lease Assignment That Creates a Hidden Landlord-Franchisor Alliance

Item 22 often includes a lease assignment or collateral assignment of lease — a document that gives the franchisor rights to your real estate lease if you default on the franchise agreement. This creates a dynamic where your landlord and your franchisor have aligned interests that may not align with yours. If you default, the franchisor can step into your lease, operate the location under the same brand with a replacement franchisee, and you lose both the franchise and the location — including any leasehold improvements you paid for. The financial impact is significant: tenant improvements in a restaurant franchise typically run $100,000–$300,000, and under a lease assignment, you have no mechanism to recover that investment upon default. Some lease assignments go further: they give the franchisor the right to approve or reject lease modifications, subletting, and even lease renewals — decisions that should be between you and your landlord. During legal review, push for a modification that limits the lease assignment to situations where you've actually been terminated for cause (not just any default), includes a reimbursement mechanism for unamortized leasehold improvements, and requires the franchisor to exercise or release its lease rights within 30 days of termination rather than holding the option indefinitely.