Being Your Own Boss: Terminating a Franchise Agreement
Whether your are the franchisee or franchisor, there may come a time when you want to terminate your franchise agreement. In the UK there are no specific laws relating to franchises and franchise agreements, so the law of contract generally prevails. This means that you should first look to the terms of the franchise agreement to see what provisions are included for bringing the agreement to an end.
Fixed term franchise agreements
Franchise agreements are always for a fixed term, which is generally five years. It is rare for a franchise agreement to have a clause saying the agreement can be terminated by either party giving notice during the fixed term so franchisees cannot give up franchises without breaching the franchise agreement and being liable for damages.
Terminating for breach by franchisee
Franchise agreements all have a clause allowing either party to terminate the franchise agreements for breach of contract. Normally the termination clause allows for a period of time for the breach to be remedied by giving notice to the defaulting party. If the breach is not remedied within, say 30 days, the termination clause will allow the contract to be terminated. Here are some examples of breaches of contract:
- failure by franchisees to pay fees set out in the franchise agreements
- failure by franchisees to meet performance levels set out in the agreements
- failure by franchisees to deliver sales reports.
Terminating for breach by franchisor
It is generally harder for franchisees to terminate franchise agreements.
Generally, franchise agreements are drafted by the franchisors and are weighted in their favour so there are seldom express clauses setting out conditions or obligations on the franchisor. For franchisees to terminate franchise agreements, it is necessary to demonstrate that an important condition of the franchise agreement has been breached which justifies terminating the agreement. The following breaches may justify termination:
- where the franchisor failed to provide an operational manual
- where the franchisor failed to provide any training
- where the franchisor failed to provide support.
Terminating by sale of the franchise
Franchise agreements can be terminated if the franchisee decides to sell the franchise. This could be because the franchisee wants to retire or because he wants sell and do something different. Good franchise agreements should contain a clause relating to the sale of the franchise. This clause should state that:
- permission for the franchisee to sell the franchise should not be unreasonably withheld by the Franchisor should the necessary conditions required for obtaining an initial franchise be met by any prospective purchaser
- the franchisee manual, know-how and other confidential information relating to the franchise must not be passed to any prospective purchaser prior to a confidentiality agreement being signed
- the franchisee must meet all the franchisor’s legal and other costs associated with the sale of the franchise as well as percentage of the purchase price in respect of administrative expenses
- if the franchisee requests that the franchisor find a suitable purchaser for the franchise then a percentage fee of the purchase price should be payable by the franchisee to the franchisor
- in the event of the franchisee selling the franchise the franchisor must be given the option to purchase the franchise at the same price and in the same terms as the proposed purchaser.
Expiry of the franchise agreement
Franchise agreements will also end on the expiry of the fixed term if the franchisee decides not to renew the franchise. Generally, franchisees have the right to renew the franchise agreement if:
- they have not breached any conditions of the agreement during the term
- they have served notice of renewal on the franchisor some months before the expiry
- they have still not breached any conditions of the agreement when notice is served and thereafter
- they sign a new franchise agreement on the same terms as the existing agreement.
Get legal advice before ending a franchise agreement
Franchise agreements should not be terminated without getting professional advice from a lawyer specialising in franchises. If you wrongfully terminate a franchise agreement it could cost you a substantial sum in damages so always get advice.