Why is the Death and Disability Clause Important in a Franchise Agreement?

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Table of Contents

• Termination 
• Transfer
• Takeover
• Perpetual Succession 
• Key Takeaways

Death and disability are two events that can, unfortunately, occur at any time and to anyone. Therefore, both franchisors and franchisees should prepare for the possibility. However, it is unlikely the franchisee will become unable to operate their franchised business due to death or serious disability. To provide security for both parties in the franchise relationship, franchise agreements often include clauses that outline what happens if the franchisee:

• dies;
• suffers a serious injury or illness; or
• unable to continue running their business.

This article will examine examples of death and disability clauses and emphasise the importance of including them in your franchise agreement.

Termination 

Franchisors sometimes include a death and disability clause that lets them terminate the entire agreement if a franchisee dies or becomes disabled.

This gives you, as a franchisor, the opportunity to offer the franchise territory to a new franchisee and safeguard your brand reputation in case one of your franchise’s operations faces extended disruption. If a replacement franchisee is not secured promptly, you could risk losing business in that area and damaging your reputation throughout the franchise network. Depending on how the clause is written, there’s also the possibility that a one-sided termination clause in a franchise agreement could be seen as an unfair contract term.

If the franchisee is a company with multiple directors, they might resist a clause allowing the termination process if one director dies or is disabled because the remaining directors could still manage the business. Also, one-sided termination clauses may not sit well with sole trader franchisees since they prevent their family members from taking over the franchised business or selling it to a new franchisee.

Transfer

Alternatively, a franchise agreement may contain a clause that provides for the sale of either:

• the franchised business to a new franchisee; or
• the franchised business’ assets to the franchisor.

This usually happens through an agreed method for valuing the assets set out in the franchise agreement.

Including this option in a death and disability clause benefits franchisees. It allows either:

• the remaining directors of the company; or
• the franchisee’s family members to recoup some money for the franchised business.

This option also helps them avoid the continued pressures of operating a franchise after a death or disability.

Takeover

Another alternative, which is likely most feasible if the franchisee is a sole trader or individual, is for the death and disability clause to contain a provision. This allows the franchisor to take over the running of the franchised business on behalf of the franchisee for a set period of time.

Generally, the franchisor provides the franchisee with the revenue generated during the time it runs the franchised business minus any reasonable costs incurred. This type of clause ensures the business continues to run smoothly, preventing any reputational damage to the franchise network. Additionally, it provides both the franchisor and the franchisee time to determine the future of the franchised business, such as if the franchisee’s family needs to sell the business. If no replacement or alternative option has been agreed upon, the franchisor is generally able to terminate the agreement after running the business for a certain time (e.g., one year).

Perpetual Succession 

A final possibility in a death and disability clause is to include an option for the continuation of the franchise agreement. This is generally most favourable where the franchisee is a company, as it allows the remaining directors to continue running the franchised business. If the franchisee is a sole trader, then a succession clause would allow the spouse or any adult children to take over from the previous franchisee and carry on the operations of the business.

As a franchisor, you should be careful to include this clause if the franchisee is not a company, as the franchisee’s family members may lack the ability to run the business successfully.

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Key Takeaways

Life is often unpredictable, so it is important to prepare for all eventualities as either a franchisor or a franchisee. Death and disability clauses are crucial because they allow for:

• Continuity: franchises rely heavily on the strength of their overall brand reputation for success. If a franchisee dies or becomes disabled, causing one franchise site to fail to operate for an extended period, it could damage the franchise’s reputation. Death and disability clauses prevent this by ensuring a clear succession plan is in place that allows the franchise to continue operating smoothly; and
• Security: the death and disability clause provides security and peace of mind for all parties by clearly setting out the procedure in the event of death or disability. A fair clause will also help give the franchisee and their family or business partners security in these situations.

If you need to review your death and disability clause or want more information, our experienced franchising lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.