People often get into unnecessary and costly disputes when ending a franchise agreement. How can you reduce the chances of this happening? Don’t end it prematurely. The franchisee has no right to end a franchise agreement unless the agreement includes an express right for the franchisee to do so – this is very uncommon. Think carefully about whether you want to end it prematurely, because if you are released, you will most likely be required to pay an exit fee or you can be sued for damages. The franchisee cannot generally transfer its rights or sell the franchise business without the consent of the franchisor. Use the cooling-off period. Under the Franchising Code of Conduct you have two cooling off periods which allow you to:
- End within 7 days of entering into your franchise agreement; or
- End within 7 days of making a payment under your franchise agreement (the cooling off right).
Consider the Costs of Selling your Franchised Business. The circumstances under which you can sell your franchised business back to the franchisor or someone else will be all written down in the franchise agreement. In some cases you may have to pay a franchise fee. Don’t Breach the Franchise Agreement A franchisor may end the franchise agreement if the franchisee has clearly breached the franchise agreement. The franchisor cannot, however, just automatically pull the pin. Under the Franchising Code of Conduct the franchisor are required to:
- tell you the specific details of the breach and how it can be remedied;
- give you time to remedy the breach; and
- give reasonable notice that the franchisor intends to terminate the franchise agreement if the breach is not remedied.
Hence, it is very important for you to communicate clearly with the franchisor if something goes wrong. Sometimes the franchisor can end the agreement without notice. Under the Franchising Code of Conduct, a franchisor does not have to provide notice and can end the agreement early if the franchisee:
- no longer holds a franchise license;
- becomes bankrupt or insolvent;
- abandons the franchised business or the franchise relationship;
- operates their business in a way which endangers public health or safety;
- is found to be fraudulent in connection with the operation of the franchised business; or
- agrees to end the franchise agreement.
Liquidation does not necessarily end the agreement. If the franchisor is experiencing financial troubles and goes into liquidation, a liquidator will take control of the company. The liquidator then assumes the rights of the franchisor and can enforce the franchise agreement. The franchisee must still pay royalties and cannot prematurely end the agreement. A new owner doesn’t change a thing. You don’t get any new termination rights just because the franchisor has sold its rights to a third party. This simply means you are now contractually bound to this new party. If you are continuing the business outside of the franchise, you need to take down any signage, paint colours, uniforms or other trademarks from the franchise. The consequences of not doing so can be serious. What does the franchise agreement say about who owns the customer lists? If it doesn’t say anything, don’t assume you can’t keep them. Be wary of ‘solicitation clauses’ which may state you are unable to solicit former customers if you drop out of the franchise. Is there a restraint of trade clause? If the franchise agreement contains a restraint of trade clause this might prevent you from operating your business at the same location under a new name. You may get around this by arguing the clause was not necessary to prevent any new franchisee being disadvantaged if they were setting-up in the same area. Be clear about what is happening with the assets. Before the franchise agreement is signed the franchisor is required to tell you what will happen to any assets you have been required to purchase. If this hasn’t happened you should seek legal advice from a franchise lawyer.