Franchise Agreement: Can It Be Terminated Early?

29/12/2017 08:00 | Start a business

Franchise agreement - can it be terminated early?

Once the franchisee and franchisor enter a franchise agreement, itís usually a commitment of running that franchise for a fixed term of around five or more years. There are potential risks involved with any new business, and itís worth thinking about what would happen if the franchise just doesnít end up being successful.

Itís worth thinking about what happens if something goes wrong. One of the most unique relationships in the business world is between a franchisor and franchisee. The relationship is often compared to that of a marriage, a parent and child or even as a mentor and student and is not without its challenges. Although the success of the franchise is the common goal of both the franchisee and franchisor, the relationship between the two doesnít always go as well as it should.

Unfortunately, the franchisor has no choice but to terminate the franchise agreement, especially if the relationship with the franchisee is unsalvageable or the franchisee has seriously breached the terms set out in the agreement.

So, what happens if either party wants to terminate the franchise agreement early? And is it even possible?

What is a franchise agreement?

But firstly, how important is the franchise agreement? A legal contract between a franchisor and franchisee, the franchise agreement outlines the responsibilities and duties of each party and the compensation they can expect to receive. Franchise agreements are always fixed term; this is usually for around 5 years.

Once the franchise agreement has been signed, the franchisee has the legal right to establish and develop the franchised outlet as well as using everything from the franchisorís systems to its trademarks. For the franchisor, the franchise agreement means thereís a legal document in place which outlines what the franchisee has agreed to in terms of paying on-going fees and running the franchise in accordance with the franchise system.

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When can you terminate a contract early?

There are no special laws applicable to franchising in the UK, which means general contract principles apply when ending a franchise agreement. If you want to leave the franchise early, youíll need to look at the terms of the franchise agreement to see what provisions are included for terminating the agreement. The simple answer is that franchisees are required to complete the fixed term set out in their franchise agreement, however there are options.

A franchisee cannot walk away from the franchise agreement without being in breach of contract and leaving themselves liable for damages. Whereas a franchisor must also be very careful when attempting to terminate the contract before itís stipulated to end, or they too may find themselves having to pay damages.

Hereís some instances when the agreement can be terminated early:

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Franchisee breach

A franchisor can terminate the franchise agreement if the franchisee breaches the franchise agreement. According to the BFA Code of Ethics, franchisees are to be given notice first so they can fix any breach in the agreement to prevent termination. If the breach is then put right by the franchisee, there may be no longer any need to terminate.

Breaches of contract include not paying the ongoing franchise fee set out in the franchise agreement, failing to meet performance levels expected as per the agreement or not sending over sales reports, amongst many others.

In the event one or more of these occur, the franchisor can begin court proceedings to recover any amounts that they are owed by the franchisee. These include the franchise fee which is owed by the franchisee under the agreement as well as monetary damages for the early termination of the franchise agreement. This usually covers the profit that has been lost from having to end it early.

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Franchisor breach

It is often much harder for franchisees to terminate franchise agreements. As the franchise agreement has been drawn up by the franchisor, itís usually heavily weighted in their favour. Itís often designed to ensure the franchisor has extensive express powers to end the agreement if it needs to be or if certain obligations are not fulfilled by the franchisee.

If a franchisee wants to terminate franchise agreements, theyíd need to demonstrate that an important condition of the franchise agreement has been breached and therefore terminating the agreement is justified. Breaches that would justify a termination include failing to provide an operational manual, not providing training and failure to provide support.

Read more: Franchise Agreement Explained

Sale of the franchise

Another reason for terminating the franchise early is if the franchisee decides to sell the franchise. This could be due to retirement or that the franchisee wishes to sell and pursue other interests. Usually there are clauses in a franchise agreement relating to franchise resales. If the franchisee wants to sell the franchise, the franchisor must often be given first refusal to buy it at the same price and on the same terms.

When it comes to franchise resales, franchisors will rarely allow for the franchise agreement to be passed on to the new franchisee. Instead, the existing franchise agreement is always terminated and the new franchisee thatís purchasing the franchise then enters into a new franchise agreement. A transfer fee will need to be paid by the franchisee when franchise resales take place, in addition to the new franchisee paying a franchise fee.

Read more: Franchise Agreement: 5 Things You Should Know

Expiry of franchise agreement

At the end of the fixed term, the franchise agreement will terminate if the franchisee does not want to renew it. Franchisees usually have the right to renew the franchise agreement if no conditions of the agreement have been breached or if they have served notice of renewal on the franchisor before the expiry. They can also renew the franchise agreement if they sign a new franchise agreement on the same terms as the existing agreement.

Read more: Will My Franchise Agreement Be Automatically Renewed?

Get legal advice before ending a franchise agreement

Terminating the agreement early always needs to be handled carefully, as a franchisor loses the franchiseeís income and risks upsetting other franchisees and prospective ones too. Plus, a wrongful termination of a franchise agreement could mean youíre faced with substantial liability claims.

Whether a franchisee or franchisor, itís important to get specialist advice from an experienced franchise solicitor before terminating a franchise.

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