The art of drafting a franchise agreement

Every franchising agreement follows the Franchising Code of Conduct. The code dictates the rights and responsibilities of the franchisor and franchisee but does not set out the Ts and Cs of the agreement itself. Although the code contains disclosure requirements and defines the parameters of the cooling off period, the Australian Consumer Law, as well as other principles of equity govern franchise agreements.

Draft the franchise agreement flexibly

Franchise agreements can cover a ten-year period, so it’s important you get it right the first time. Franchisors aren’t psychic and they can’t foresee into the future. That’s why it’s important to draft in a flexible manner. Importantly, section 21 of the ACL prohibits unconscionable conduct between businesses. This prevents franchisors from taking unfair advantage of franchisees that may be placed in a weaker bargaining position during the term of the franchise agreement. As such, clauses that allow the franchisor to amend the agreement without consulting the franchisee are ineffective and cannot be enforced.

When you draft the agreement, incorporate wording that provides a flexible approach to ensure the model is successfully executed and to allow for any tweaking of the documents that hold up the agreement. Here are a few of the fundamental clauses that must be drafted by a franchise solicitor in any franchise agreement:

‘Term’ and ‘renewal’

According to the law, there is no intrinsic right to renew a franchise agreement. This said, the desirability to renew the term of the agreement when approaching its final stages will be affected by how successful the potential franchisee’s attempts to grow the business end up being.

The beginning of a new term, as a franchisor, is the perfect time to review the agreement and consider amending the clauses of the agreement. When drafting the renewal clause, make sure your franchise solicitor makes the exercising of the renewal clause contingent on the franchisee agreeing to the current agreement, instead of an older version.

On top of this, at the end of the term, if the relationship was not entirely successful for either party, the agreement can be terminated. Some franchises are well established and some are new. For the most part, newer franchises have shorter and more flexible terms. Accordingly, more established franchises have longer term, more stable arrangements – an attractive feature to many prospective franchisees.

Prices and Costs

There are numerous fees involved in becoming a franchisee. The agreement must clearly explain what each payment is for and when these costs become payable. It should also be flexible so that the payments can change according the many market influences. It might be the case that mid-way through the term you realise the current agreement is not maintainable and bringing down the franchise system. For this reason, it’s imperative that a franchise solicitor reviews, or even drafts, your agreement with a franchisee. Draft flexibly so that any changes, such as a marketing fund, can still be initiated at a later stage during the agreement.

Territory

A franchise solicitor should carefully draft the ‘territory’ clause. It’s common for franchisees to demand exclusivity over the agreed location for the term of the agreement. This, however, may impede on the growth potential of the franchise as a whole, and as such must be accounted for in the wording of the clause. It’s not unlikely that demographical trends will change over time for that particular location and, accordingly, you will want to update the terms of the agreement.

Since the territory is an essential clause and must be determined prior to the entering of any agreement, the best approach to drafting the clause is to allow for any change to the territory to be based on principles that both parties have agreed to.

The operations manual

Since unilateral amendments to any franchise agreement cannot be enforced, it is better to only contain essential terms in the actual agreement. Things like fit-out, costs and training should also feature in the operations manual and other documents so that you, as franchisor, can adjust the operations of the relationship in response to any circumstantial changes. Have a franchise solicitor draft the terms of your agreement so that you have not invalidated any of the important clauses.

Conclusion

If your franchise happens to be a great success, it goes without saying that your agreement will need to be adjusted accordingly. For this reason, it’s important you and your franchise solicitor allow for flexibility in the way it’s drafted. Get the fundamentals down pat at the beginning of the agreement and you could save yourself valuable time and money

Get the best advice on drafting your franchise agreement from our experienced franchise solicitors. Contact LegalVision today on 1300 544 755.