The franchising code of conduct allows franchisees to terminate their franchise agreement in limited situations. The circumstances in which you have a right to terminate the agreement are outlined in the disclosure document. This document should have been provided to you by the franchisor before you signed. In this article, we look at the different situations in which you may be able to cancel a franchise agreement.
Cancellation During the Cooling-Off Period
If you change your mind soon after signing the franchise agreement, you can rely on the cooling-off period to safely back out of the agreement early. The code of conduct gives you an automatic right to terminate within seven days of:
- entering the agreement; or
- making a payment under the agreement.
The franchisor must then arrange for a refund of any payments you have made under the franchise agreement within 14 days.
However, be aware that the code does allow franchisors to retain certain costs which have been reasonably incurred. Your franchise agreement should set out what these costs are. Generally, this means you will not be able to recover payments made towards the franchisor’s legal expenses or training costs.
Cancellation with Franchisor’s Consent
Once the cooling-off period has expired, you can only terminate a franchise agreement early with the franchisor’s consent.
The best way to acquire consent is to clearly communicate your intentions to the franchisor and determine in what circumstances they will agree to an early termination. For example, some franchise agreements include a termination clause which allows early termination if the franchisee pays an exit fee to the franchisor.
If the franchisor consents to early termination, make sure they provide you with a deed of surrender or deed of release. This is a formal document that sets out the terms of termination. It is important to have a lawyer review this document before you sign it to ensure you understand your obligations after termination (see below).
Alternatively, you can also exit your franchise by selling your business. You can then arrange for your interest under the franchise agreement to transfer to the incoming purchaser. This means that the purchaser will take over the rest of the agreed term. Be aware that you will still need to obtain the franchisor’s consent to do this.
Cancellation Due to Breach
You will not need the franchisor’s consent to terminate if they have failed to fulfil obligations owed to you. These obligations, prescribed by the code, include duties regarding:
- information disclosure (e.g. a franchisor may be in breach if they failed to provide you with a disclosure document when you entered the franchise);
- record-keeping (e.g. a franchisor must keep supporting material relating to the disclosure document for six years); and
- acting in good faith (e.g. a franchisor may be in breach if they refuse to engage in the contractually-stated dispute resolution).
Ultimately, the franchise agreement is a contractual agreement between you and the franchisor. This means that the right to terminate is generally available only if the franchisor breaches an essential term of the agreement.
If you have decided to terminate your agreement, make sure you refer to your franchise agreement. The agreement will set out a process you must follow to ensure compliance. Failing to comply with your obligations could mean you have to pay money to the franchisor.
You may also still have continuing obligations to the franchisor even if you successfully terminate the agreement. For example, franchise agreements commonly include a restraint of trade clause. This clause restricts your ability to carry on a similar business:
- in a certain area;
- with the same clients; or
- for a time after the agreement is terminated.
You have the right to cancel your franchise agreement during the cooling-off period. After the cooling-off period expires, the right to terminate usually lies with the franchisor. You can then only terminate with the franchisor’s consent or due to a franchisor’s breach.
If you have any questions about your options for exiting a franchise agreement or need assistance reviewing a franchise agreement, get in touch with LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.
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