A franchise agreement is usually written in an optimistic atmosphere, with both parties focused on opening and growth. Yet the most sensitive moment in the relationship is when it ends, whether on expiry of the term or because one party decides to terminate early. Understanding the consequences in advance is what protects the franchisee's investment and the franchisor's brand reputation at the same time.
Expiry of the term and renewal
The agreement should set a term long enough for the franchisee to recover its investment and earn a reasonable return. As the end of the term approaches, practical questions arise:
- Is renewal automatic, or does it require a request within a set period before expiry?
- What conditions may the franchisor impose for renewal, such as refurbishing the fit-out or signing the agreement in its current form?
- Is there a renewal fee, and how much is it?
- On what grounds may the franchisor refuse renewal?
The Franchise Law contains provisions on non-renewal and the rights that may accrue to the franchisee in certain cases, so it is important to review these provisions before making any decision.
Early termination by the franchisor
The franchisor needs a right to terminate for material breach of standards or financial obligations, because such breaches affect the brand and the whole network. A balanced agreement, however, ties this right to clear grounds and usually gives the franchisee a period to cure the breach before termination, except for serious breaches that cannot be cured.
Early termination by the franchisee
The franchisee may likewise seek termination if the franchisor breaches its material obligations, such as ceasing to provide the agreed support or losing the right to the trademark. The Law grants the franchisee rights in specific cases, so it is advisable to document breaches and notify the franchisor of them in writing before taking any step.
What happens after the relationship ends?
- De-identification: ceasing to use the trademark, logos and marketing materials within a reasonable period.
- Confidential information: returning the operations manual and ceasing to use trade secrets.
- Inventory and equipment: Does the franchisor have the right to buy them, and at what price?
- Non-compete: the scope of the restriction in time and place, a clause that must be reasonable to be enforceable.
- Financial entitlements: settling royalties and outstanding amounts between the parties.
Practical advice for both parties
- Review the termination and renewal clauses before signing, not when a dispute arises.
- Document correspondence and notices in writing, and observe the periods stated in the agreement.
- Do not take the step of termination before confirming that its legal and contractual conditions are met.
- Consider negotiating an amicable termination that clearly sets out the rights, as it is often less costly than a dispute.
Ending a franchise relationship in an orderly way protects both parties and preserves the brand's reputation in the market. If you are approaching the end of your agreement or considering terminating it, early legal advice will help you understand your options before you commit to any step.