Proposed Law Could Impose New Obligations on Hospitality Franchises in New Jersey

The New Jersey legislature is considering a bill that would impose new regulations on hospitality franchises. The bill would create a separate definition for hospitality franchises, impose a number of additional obligations beyond the New Jersey Franchise Practices Act (the “FPA”), and make them subject to the New Jersey Consumer Fraud Act (the “CFA”). Hospitality franchisors in New Jersey should follow the proposed law’s progress through the legislative process.

Originally introduced in 2020, New Jersey Assembly Bill 1958 proposes new regulations specific to hospitality franchises. Most recently, on May 12, 2022, the bill passed from the Assembly Judiciary Committee onto the Assembly Commerce and Economic Development Committee.

The bill defines a “hospitality franchise” similarly to a franchise under the FPA, but would apply when “the goods include any hotel, motel, inn, tourist camp, tourist cabin, tourist home, rooming house or similar establishment where sleeping accommodations are supplied for pay to transient or permanent guests.” This open-ended definition could encompass a wide range of housing and tourist activities including not only standard hotels, but also apartments, mobile home facilities, camps, or even short-term rental homes.

The bill could apply to businesses beyond those covered by the FPA. Generally, the FPA applies when (1) the franchise is located in New Jersey, (2) involves more than $35,000 in gross sales of products and services from franchisor to franchisee, and (3) more than 20% of the franchisee’s gross sales are intended or actually derived from the franchise. The bill, however, would apply to any hospitality franchise either (1) located in New Jersey or (2) where the franchise is sold to a New Jersey resident and more than 20% of the franchisee’s gross sales are intended or actually derived from the franchise. This broader definition could mean hospitality franchises owned by residents of New Jersey, but wholly located outside of New Jersey, may need to comply with the newly proposed law, but not the FPA.

The greatest overhaul proposed by the bill would apply the CFA to hospitality franchises. The CFA is a strong consumer protection bill with a private right of action, mandatory treble damages, recovery of attorneys’ fees, and does not limit other consumer rights and remedies.

Beyond this, the bill would also impose a number of other regulations on hospitality franchises. These include certain practices and franchise agreement terms relating to restrictive covenants, capital investments, undisclosed vendor rebates, general releases, supply sources, exclusive territory, material changes, undisclosed fees, loyalty programs, guest reviews, property management systems, and penalties for failure to perform.

All in all, the bill would result in a substantial change to the hospitality industry in New Jersey, applying to all franchise agreements for a hospitality franchise entered into, modified, or renewed after the law is enacted.  For now, the bill continues to work its way through the legislative process, and hospitality franchisors in New Jersey should pay close attention to its progress.