The purpose of a franchise agreement is to protect the franchise system and the brand. The key component to franchising is uniformity, and the franchise agreement provides the franchisor with the ability to enforce its policies and procedures. However, franchisees often complain that their franchise agreement is too one-sided and overbearing. Such an agreement can create animosity between the franchisor and its franchisees and deter many potential franchisees from purchasing a franchise. In such circumstances, a franchisee may feel they can no longer work under the rules of the franchise agreement and look to exit. In this agreement, how to terminate a franchise agreement, we take a look at the process and mechanism involved.
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How does a franchise agreement work?
A franchise agreement is a legal document that outlines the responsibilities and obligations of each party. It should also set out what compensation they can expect to receive if things go wrong. By signing the franchise agreement, the franchisee agrees to manage their own branch of the business in accordance with the specified franchise model and pay ongoing fees and royalties to the franchisor. In return, the franchisor will often provide training and support in areas such as business operations and marketing.
Franchise agreements often last for a fixed term of five or more years, with the option to extend once it’s finished. The longevity of the franchise is in the best interest of both the franchisor and the franchisee but, on occasion, one party will request the termination of the agreement.
Is it possible to terminate the agreement before the end of the term?
A franchise agreement can be terminated early before the end of its agreed term. Although ending the agreement early might seem a little drastic, it can be quite counter-productive for franchisors to keep franchisees in the business when they don’t want to be there. If they’re not enthusiastic about their work and committed to pushing the brand forward, it’s likely the franchise unit will suffer, with negative implications for the company as a whole.
What happens at the end of term of a franchise agreement?
If the franchisee reaches the end of their fixed-term without having breached any of the terms of the contract, the agreement will terminate. It is at this point that the franchisee can choose to either walk away or renew the contract. If they would like to renew the agreement, franchisees are usually required to give notice of renewal to the franchisor before the first contract expires. Alternatively, the franchisee could renew the agreement by signing a new franchise agreement on the same terms as the existing one.
Under what circumstances might the agreement be terminated?
There are a number of reasons why a franchise agreement may be terminated early and they can include:
The Franchisor is in breach of contract
The franchisors can be seen to be in breach of contract if:
- They don’t provide the level of training and ongoing support described in the franchise agreement
- They don’t take measures to protect the franchisee’s business or territory
- They commit fraud
- They are declared bankrupt
The Franchisee is in breach of contract
The franchise agreement is normally drafted up by the franchisor. Consequently, it is usually weighted in their favour and designed to make sure they have the power to end the agreement if certain obligations are not fulfilled by the franchisee.
The franchisor can terminate the agreement if the franchisee is in breach of the contract. This could happen if the franchisee:
- Doesn’t adhere to the franchisor’s business standards or stipulations
- Doesn’t have the correct licences or permits required to trade
- Doesn’t keep up royalty or marketing payments
- Is declared bankrupt
- Is convicted of a crime
If any of these situations occur, the franchisor must give the franchisee notice so they have the chance to resolve the issue and prevent termination. If the issue is not resolved, the franchisor can initiate court proceedings to recover any money the franchisee owes them – either in the form of franchise fees or monetary damages.
If the franchisee decides to sell their franchise
At some point and for a variety of reasons, the franchisee may decide to sell their franchise rights so they can retire or pursue other interests. Usually, the franchise agreement will outline the franchise resale process and how it should run. However, the franchisor has the right of first refusal to buy the unit at the same price and on the same terms as new franchisees.
If a new franchisee is brought into the equation, it is unlikely they will pick up where the previous franchisee left off. Instead, the existing franchise agreement is terminated and a new contract is drawn up. In this case, the previous franchisee will pay a transfer fee while the new franchisee pays the standard franchise fee.
How we can help
We have a proven track-record of helping clients terminate their franchise agreements. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact our Corporate Solicitors
It is important for you to be well informed about the issues and obstacles you are facing. However, expert legal support is crucial in terms of saving you money and ensuring you achieve a positive outcome.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or allow a member of the team to get back to you by filling in our online enquiry form. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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