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If a franchisee breaches your franchise agreement, there are some legal and practical considerations you should make before terminating. For instance, according to the Franchising Code of Conduct (the Code), you may issue a breach notice to your franchisee. In this case, you must give them enough time to respond and rectify the issue. If you do not, you risk breaching the agreement yourself. This article explores some considerations you should make before you terminate your franchise agreement.

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Consider the Consequences of Termination

It can be frustrating when a franchisee breaches your agreement. However, termination might not be the most practical solution. Therefore, when considering terminating a franchise agreement, it is crucial to consider the practical steps you will need to take.

As a franchisor, you should consider:

  • what will happen to the business premises following termination (especially where the franchisee is on the lease or there is no step in deed);
  • whether the territory is booming and therefore you should keep it in the franchise system;
  • how you will prevent the franchisee from continuing to access your franchise business’ intellectual property;
  • what other steps will you need to take to prevent the franchisee from operating the franchise business; and
  • how damaging the breach is to the franchise system as a whole.

Ultimately, it would help if you kept these practical considerations at the forefront of your mind when deciding to terminate the agreement. Nevertheless, you must also consider the following legal requirements when terminating a franchise agreement.

Issue a Breach Notice 

Additionally, when your franchisee breaches the agreement, you may be able to issue them a breach notice. Although, according to the Code, the breach notice must: 

  • be in writing;
  • specifically outline the breach; 
  • notify the franchisee that you propose to terminate the franchise agreement because of the breach;
  • identify the term of the franchise agreement which the franchisee has breached and the franchisee’s conduct that violates the term;
  • advise the franchisee of what they must do to remedy the breach; and
  • provide the franchisee with a reasonable amount of time to remedy the breach.

A reasonable period can depend on:

  • the type of breach alleged; and
  • whether you have previously issued a notice of the kind of breach.

However, under the Code, ‘reasonable time’ does not have to be more than 30 days.

If your franchisee remedies the breach, you should not terminate the agreement because of that breach, even if the franchisee repeats the same breach later on. In this case, you should issue a new breach notice. Alternatively, you may terminate the agreement if the franchisee fails to fix the breach.

Issue a Termination Notice

If you complete the steps outlined above and your franchisee does not rectify the breach, then you may be able to provide your franchisee with a termination notice if 

Whether you can terminate the franchise agreement based on the breach notice depends on your case’s circumstances. 

Furthermore, if you fail to include all the Code’s information in your breach notice, the breach notice could have no effect. Consequently, the termination might also be ineffective if you attempt to terminate the agreement by relying on the ineffective breach notice. For this reason, it is essential to seek legal advice before you issue a termination notice.

Termination in Special Circumstances

The Code allows you to terminate a franchise agreement in specific circumstances by giving your franchisee seven days’ written notice. The particular circumstances include instances where your franchisee:

  • loses a licence that they require to operate the franchise, such as a building licence or liquor licence;
  • goes bankrupt or insolvent;
  • is deregistered by the Australian Securities and Investments Commission (ASIC);
  • voluntarily abandons the franchise;
  • is convicted of a serious offence with a minimum sentence of five years or commits an ‘offence’ under the Corporations Act;
  • risks the health or safety of the public because of how they run the franchise; or
  • commits fraud concerning the franchise, such as falsifying company records or intentionally misstating income.  

If the franchisee does not dispute the notice within seven days, you may proceed to terminate the franchise agreement. However, if the franchisee disputes the notice, you cannot terminate until at least 28 days after you issue the notice.

Key Takeaways

Before you terminate the franchise agreement, you should consider the practicalities of terminating your franchise agreement. In addition, you must:

  • give franchisees reasonable time to rectify the breach after giving them written notice of the breach per the Code;
  • issue a termination notice if you issue the breach notice correctly but the franchisee fails to rectify the breach in the specified time; and
  • consider if circumstances allow you to terminate the franchise agreement after giving seven days’ notice.

If you have questions about dealing with a franchisee’s breach of the franchise agreement, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page

Frequently Asked Questions

How much time should I give a franchisee to rectify a breach?

You must give your franchisee a reasonable period to rectify the breach. What is reasonable can depend on the type of breach and whether you have previously issued a notice of the kind of breach. However, ‘reasonable time’ does not have to be more than 30 days.

What is ‘special circumstances’ termination?

Under the Franchising Code of Conduct, ‘special circumstances’ termination allows you to terminate a franchise agreement after giving seven days’ notice. The special circumstances range from where a franchisee loses a licence that they need to operate the franchise to being deregistered by the Australian Securities and Investments Commission (ASIC). 

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