Franchise Agreement: Can It Be Terminated Early?

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Franchise agreement - can it be terminated early?

Originally uploaded on 29/12/2017. Updated on 13/04/2019.

A typical franchise agreement lasts for a fixed term of five or more years. The longevity of a franchise is in the best interest of both the franchisor and the franchisee but, from time to time, the franchisor or the franchisee will have to request the termination of the franchise agreement. This could be because the franchise is unsalvageable or the franchisee has breached the terms set out in the agreement.

Every new business involves risk, so it is worth considering what will happen if your franchise is not successful.

What is a franchise agreement?

First of all, lets discuss the franchise agreement itself. The franchise agreement is a legal contract that outlines the responsibilities and duties of each party and the compensation they can expect to receive if things go wrong. Once the agreement has been signed, the franchisee has the legal right to establish and develop the franchised outlet using the business strategies and trademarks.

By signing the franchise agreement, the franchisee states that they agree to manage the franchise in accordance with the specified franchise model and pay ongoing fees and royalties to the franchisor. In return, the franchisor might agree to provide training and support in key areas such as business operations and marketing.

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Rules and Regulations

There are no laws which apply to the UK franchising system, so those involved in a franchise must look at the franchise agreement to confirm any queries. As a result, the agreement should provide ample information on early terminations. In general, franchisees should take the appropriate measures to fulfil their obligations as set out in the franchise agreement, managing the business until the end of the specified contract term.

Always Seek Legal Advice

Franchise agreements should always be treated with caution. It is a legal document and signing, altering or terminating it could have significant consequences especially for a new entrepreneur. By signing an agreement, a franchisee agrees to pay regular fees and the franchisor agrees to support the franchisee for the length of the contract period. By agreeing with the termination of the franchise, the franchisor loses the franchisees income and could damage their reputation.

On the other hand, the wrongful termination of a franchise agreement could constitute a breach of the contract. If this happens, either party could be faced with substantial liability claims and be forced to pay damages. Therefore, any action must be taken carefully.

The rules surrounding franchise terminations can be extremely confusing, and whether youre a franchisor or a franchisee, it can be helpful to seek specialist advice from an experienced franchise solicitor before taking steps to terminate a franchise. This will minimise the risk of incurring monetary penalties and damaging your reputation.

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When can you terminate a franchise agreement early?

There are circumstances in which franchisors or franchisees who wish to stop trading can end the franchise agreement. Here are several examples of such situations:

Franchisee Breach

A franchisor can terminate the agreement if the franchisee breaches it for any reason. A franchisee could breach the contract if they fail to pay fees, send regular reports or meet performance targets. If this happens, the franchisor must give notice to the franchisee so they have a chance to resolve the issue and prevent termination, according to the BFA Code of Ethics. If the issue is not resolved, the franchisor can initiate court proceedings to recover any money that the franchisee owes them either in the form of franchise fees or monetary damages.

If the franchisee breaches the contract by terminating it early, the remuneration should cover the loss of profit from which the franchisor would otherwise have benefitted.

Franchisor Breach

Because the franchise agreement has been drawn up by the franchisor, it is usually weighted in their favour, making it harder for franchisees to terminate it. Also, the agreement is often designed to ensure that the franchisor has the power to end the agreement if certain obligations are not fulfilled by the franchisee.

However, if a franchisee wants to terminate franchise agreements, they should make sure that they can justify the termination of the contract by demonstrating that an important clause has been breached by the franchisor. Franchisees should ask themselves: Has the franchisor failed to provide an operations manual, training or an appropriate level of support?

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The Sale of the Franchise

A franchisee might also want to terminate the agreement if they decide to sell the business on and retire or pursue other interests. Usually, a franchise agreement will outline the process of franchise resale.

Often, if the franchisee decides to sell the business, the franchisor has the right of first refusal to buy it at the same price and on the same terms as new franchisees. If a new franchisee is brought into the equation, they will rarely pick up where the previous franchisee left off. Instead, the existing franchise agreement is terminated and a new agreement is drawn up. In this case, the previous franchisee will pay a transfer fee while the new franchisee pays the standard franchise fee.

The Expiry of the Franchise Agreement

If the franchisee reaches the end of their fixed term without having breached any of the regulations, the agreement will terminate. At this point, the franchisee can choose either to 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.

However, a franchisee could also renew the agreement by signing a new franchise agreement on the same terms as the existing one.

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