Termination and Renewal Rights in Franchising

Termination and renewal rights are important considerations for both franchisors and franchisees. Knowing these rights can help prevent disputes and make sure that a franchise relationship goes well.

Franchisees must review their franchise agreements carefully so they know what their rights and responsibilities are. Franchisees should cooperate with franchisors to ensure successful renewals and should exercise their termination rights in good faith.

Introduction

Franchising allows individuals to own and operate a business while benefiting from the brand and systems of an established company.

However, like any business relationship, disputes can arise between franchisors and franchisees. In particular, issues related to termination and renewal rights can be contentious.

Termination Rights

These refer to the circumstances under which a franchisor can terminate a franchise agreement. These rights are typically outlined in the franchise agreement and can vary from one agreement to another.

Some common reasons for termination include non-payment of fees, breach of contract, poor performance and insolvency or bankruptcy.

Key Points:

• It’s important to note that termination rights must be exercised in good faith.
• Franchisors cannot terminate agreements for arbitrary or discriminatory reasons.
• Franchise agreements should have clear and unambiguous termination clauses listing the events that give the franchisor the right to terminate.
• Although franchisors want broad discretion for termination, the agreement should not include minor breaches as reasons for termination.
• Courts dislike one party having the right to terminate a long-term contract for minor breaches, especially if they’re economically more powerful than the other.

Example Termination Procedure

• Franchisors should have a clear procedure and not rush to terminate the agreement, except in cases of serious breaches. This might be breaching confidentiality or deliberate under-declaration of turnover for example.
• The franchisor should identify problems and offer help and support to correct them. If there’s no improvement, the franchisor should advise that no improvement has been achieved and agree an “Improvement Notice” with the franchisee. This should be detailed and include a reasonable timescale for rectification.
• If there’s still no improvement, the franchisor should require the franchisee to comply with the improvement notice and serve a notice that failure to improve constitutes a breach. This should furthermore state that the breach must be rectified within the specified timescale.
• If there is still no improvement, the franchisor should give notice that if no improvement is achieved within days, the franchisor will terminate the agreement.
• All of the above should be set out in writing and the franchisor should offer assistance at each stage.
• Franchisors should remain fair and polite at all times.

Renewal Rights

These rights refer to the ability of a franchisee to renew their franchise agreement once the initial term has expired.

A franchise agreement is often for a fixed time period, but the franchisor may offer renewal of the agreement for an additional term.

The rights are outlined in the franchise agreement and may include the right to renew automatically, to renew with the franchisor’s consent, or to renew with certain conditions.

Some agreements may include a non-renewal clause, which means the agreement will automatically end at the end of the term. The franchisee will not have the right to renew in this case.

Duration

Five years is the typical duration of a franchise contract in the UK. Although a small number of franchise agreements are for less than this, it’s unlikely in a true franchise, save for extremely low-cost franchises.

A tiny fraction of franchises are also issued for seven, ten, or longer years. Even fewer are granted for longer terms.

Franchisors like McDonald’s, Burger King, and KFC give out licences for a period of twenty years that mirrors the lease that franchisees sign and, of course, accounts for the hefty start-up expenditures.

In reality, only exceptional conditions would allow a franchisor to offer franchises for a duration longer than five years.

Five years is an extraordinarily long term to commit to in any commercial arrangement. Most commercial parties would not want to do so.

An operations manual that allows for operational modifications in franchising gives franchisors additional flexibility. However, these changes cannot go against the terms of the franchise agreement.

The advantage of having a five-year term is that it allows a franchisor to submit an updated franchise agreement on renewal. They can also withhold it if the franchisee’s performance has been subpar.

Some franchisors think that if they are to have a long-term relationship, there’s little advantage in ending that arrangement after five years. A franchisor typically finds it simpler to refuse a renewal than to end the contract.

Factors to consider include the length of the renewal term, any changes in the terms and conditions, and the franchisor’s right to terminate the agreement at the end of the renewal term.

Typical Conditions for Franchise Renewal

1. Notice period:
   The franchisee must give notice to the franchisor of their wish to renew between 3-9 months before the expiry of the term.
2. Compliance:
   The franchisee should not have committed any serious breaches, have complied with the agreement, and not be in breach of it.
3. Claims:
   The franchisee must give up any claims against the franchisor.
4. Standards:
   The franchisee must ensure that the franchise meets the franchisor’s current standards.
5. Renewal fee:
   The franchisee may be required to pay a fee, set at a low level to reimburse the franchisor’s costs.
6. Performance: The franchisee may lose the right to renew if their performance has been poor.
7. New agreement:
   The franchisee must agree to the then-current franchise agreement of the franchisor, with any alterations being based on fair and objective commercial standards that do not favour the franchisor over the franchisee.

Renewal rights are not guaranteed. Franchisees must meet certain requirements, such as being in good standing and meeting performance standards, to be eligible.

Protecting Your Rights

Franchise agreements can be complex, and it’s crucial for franchisees to be aware of their rights and obligations under the agreement. Consulting a specialist franchise solicitor can help protect franchisees’ rights by:

1. Reviewing the franchise agreement in detail and explaining any confusing or unclear terms.
2. Identifying any conditions or requirements that must be met for termination or renewal.
3. Advising on the best course of action in case of termination or non-renewal.
4. Negotiating with the franchisor on behalf of the franchisee to protect their interests.
5. Representing the franchisee in any legal disputes that may arise.

In summary, consulting a franchise lawyer can help ensure that franchisees are fully aware of their rights and responsibilities, and can take the necessary steps to protect themselves and their business interests.

FAQs

What are termination rights in franchising?

Termination rights refer to the ability of a franchisor or franchisee to end the franchise agreement before the expiration of its term. This may be due to various reasons such as breach of contract, bankruptcy, or a mutual termination of the agreement.

What are renewal rights in franchising?

Renewal rights refer to the ability of a franchisee to renew the franchise agreement at the end of its term. This allows the franchisee to continue operating the franchise business after the original term of the existing agreement has expired.

Can a franchisor terminate a franchise agreement at any time?

No, a franchisor cannot terminate a franchise agreement at any time without cause. The franchise agreement will typically outline the circumstances under which the franchisor may terminate the agreement. This might be for reasons such as non-payment of fees or breach of contract.

What are the consequences of termination for a franchisee?

The consequences of termination for a franchisee can be severe. They may lose their investment in the franchise and any income generated from the franchised business. In some cases, the franchisee may also be required to pay damages to the franchisor for breach of contract.

Can a franchisee renew their franchise agreement indefinitely?

No, a franchisee cannot renew their franchise agreement indefinitely. The prospective franchisee agreement will typically specify the number of renewal periods available and any conditions that must be met.

What should franchisees consider when negotiating termination and renewal rights?

Franchisees should carefully review the rights outlined in the franchise agreement before signing. They should consider negotiating for favourable terms, such as the ability to renew for additional terms or terminate without penalty under certain circumstances.

Can termination and renewal rights be changed after the franchise agreement is signed?

Changes to franchise rights can happen after signing, but both parties must agree and document any modifications in writing.

Please note: None of the above constitutes financial and/or legal advice. We advise people to seek their own professional advice suited to their personal circumstances. You can find franchise specialist legal and accounting services in our directory.