Does a Franchisor Waive Contractual Rights to Terminate By Accepting Performance After Repeated Defaults? A Federal Court in Maryland Says Maybe

Does a Franchisor Waive Contractual Rights to Terminate By Accepting Performance After Repeated Defaults? A Federal Court in Maryland Says Maybe, and Denies Summary Judgment on Franchise Termination and Non-Compete Claims

On June 12, 2026, the U.S. District Court for the Eastern District of New York issued a decision in Kiddie Academy Domestic Franchising, LLC v. Paradise Organization Corp., 2026 WL 1705964 (E.D.N.Y. June 12, 2026), granting in part and denying in part a franchisor’s motion for partial summary judgment. The court ruled that material issues of fact precluded summary judgment on the franchisor’s breach of contract and non-compete enforcement claims, particularly as to whether the franchisor waived its right to terminate the franchise agreement without notice and an opportunity to cure.

While the court granted summary judgment in favor of the franchisor on certain franchisee counterclaims, it allowed core contractual disputes regarding termination and post-termination obligations to proceed to trial.

FACTS AND RULINGS

The plaintiff franchisor, Kiddie Academy Domestic Franchising, LLC (“Kiddie Academy”), entered into a franchise relationship with defendant Paradise Organization Corp. (“Paradise”) to operate a childcare center. The relationship included a renewed franchise agreement after expiration of the original term. Under the agreement, the franchisee was required to make royalty and brand fund payments and comply with operational standards, including non-compete obligations.

Chronic Payment Defaults and Restructuring Agreements

The franchisee fell into substantial arrears, leading to a 2018 restructuring including a settlement agreement, promissory note, and Voluntary Termination Agreement (VTA), which allowed immediate termination upon default without notice. Subsequently, the franchisee continued to fall behind on payments and as of March 4, 2024, it owed more than $48,000. As a result, on March 4, 2024, the franchisor invoked the VTA to terminate the Franchise Agreement without giving the franchisee notice and an opportunity to cure.

Waiver of Condition Precedent

The franchisee first asserted that the VTA allowing termination without notice never became effective because the franchisor never executed the document, despite an unambiguous condition precedent that required the plaintiff to sign the VTA before it became effective. However, the court found that although the VTA required execution by the franchisor, under Maryland law, a party to a contract may waive a condition precedent by taking actions that are inconsistent with an intent to rely on the protections of that condition precedent. Here, the court held that the franchisee’s waiver by conduct was obvious because it acted as if the franchisor had signed it, and thus the waiver could be determined as a matter of law. The court concluded that the franchisee’s conduct constituted waiver of the signature requirement, rendering the VTA effective.

Waiver Through Continued Performance

On the issue of termination, the court found that the franchisee’s failure to make timely payments and other breaches may have provided grounds for termination of the Franchise Agreement under the VTA, but the franchisor continued to accept payments after the December 31, 2018 deadline and did not invoke the VTA to terminate the Franchise Agreement until March 4, 2024 – nearly six years after entering into the VTA and five years after satisfaction of the 2018 Promissory Note. The court found that continued acceptance of late payments over several years could constitute waiver of termination rights, creating a triable issue of fact.

Effect of Non-Waiver Clauses

Both the VTA and the 2018 Settlement Agreement contain non-waiver language providing that the failure to enforce any term of this Agreement or the Franchise Agreement or the Ancillary Agreements shall not constitute a waiver of any rights. The court held that whether the franchisor intended to waive these non-waiver provisions created another issue of fact, which must be considered by the jury.

Non-Compete and Injunctive Relief

The court denied summary judgment on non-compete enforcement because validity of termination remained disputed.

Disposition of Counterclaims

The court dismissed certain counterclaims (implied covenant and conspiracy) but allowed breach of contract and declaratory judgment claims to proceed.

KEY TAKEAWAY

• The course of conduct can undermine strict contractual rights and the parties to a franchise agreement must be wary of whether their conduct constitutes a waiver of certain rights.
• Non-waiver clauses are not absolute and can also be waived by such conduct.

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