What is a Renewal Clause in My Franchise Agreement?

In Short

• Franchise renewal is not automatic – Franchise agreements do not automatically renew unless the contract states otherwise. If no renewal clause exists, the agreement ends when the term expires.
• Know your renewal rights – Check the renewal clause for conditions, fees, and notice requirements to ensure you meet all obligations.
• Plan ahead – Missing renewal deadlines or failing to comply with the agreement can weaken your negotiating position or lead to non-renewal.

Tips for Businesses

Start reviewing your franchise agreement at least 12 months before renewal. Note key deadlines, understand renewal costs, and assess your business’s performance. If the franchisor can change terms upon renewal, negotiate early. Consulting a franchise lawyer can help you avoid costly mistakes and secure the best terms for your business.

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Table of Contents

• Renewal vs Extension
• Australia’s Current Position
• Disclosure Requirements 
• What to Do When You Have a Renewal Clause
• Holdover Period 
• Issues to Consider
• Key Takeaways
• Frequently Asked Questions

Most franchise agreements will include a renewal term and express provisions. The renewal clause sets out when a franchisee will have a right to renew. It also sets out how they should notify the franchisor of the exercise of that right. Suppose you have been operating a franchise business for almost three years, and your initial term was four years. With only one year left of the initial term, you need to consider if you wish to renew your franchise agreement (if you have renewal rights). You must also consider how you will do so. Franchise renewal is an area of law that often causes much disagreement between franchisors and franchisees. Therefore, you must approach the process of renewal with careful consideration. 

This article will outline the renewal clause in your franchise agreement and help you decide whether to renew or extend your agreement. 

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Renewal vs Extension

Before we consider a renewal clause, it would be helpful to understand the difference between renewing and extending the franchise agreement.

A renewal term is a fixed period after the initial term. During this time, the franchisee may choose whether they will continue operating the franchise business. Therefore, you may often find that the renewal and initial terms are the same. For instance, your agreement may consist of an initial term of five years and a renewal term of five years. Alternatively, the initial and renewal terms may reflect the initial and renewal terms within the relevant lease. 

In contrast, extending the term within your franchise agreement differs from renewal. Commonly, an extension will depend on the franchisor’s discretion. When you choose to extend a franchise agreement, the original franchise agreement’s terms and conditions will continue from the end of the initial term. Essentially, the initial term continues instead of a new one beginning.

Furthermore, following the Covid-19 relief provisions, you will find franchisors extending their franchise agreements instead of renewing them. This extension mirrors the extensions to the leases provided by lessors as part of the relief scheme. 

Australia’s Current Position

No automatic renewal rights exist in a franchise agreement unless the franchisor expressly outlines those rights. Similarly, no legislation outlines the drafting requirements for renewal clauses. This means a franchise agreement that does not provide for any renewal will expire on the end date of the term within the franchise agreement. Moreover, on this date, the franchisee will cease to have a right to operate as a franchisee, as those rights will lapse. 

Disclosure Requirements 

The Australian government places important disclosure requirements on franchisors to any current or prospective franchisees. This enables franchisees to engage in discussions about their franchise agreement with the correct information before:

• entering;
• continuing; or
• renewing the franchise agreement.

Further, there are several things that your franchisor must disclose within the disclosure document before they renew or enter into a franchise agreement. This includes: 

• what is to happen at the end of the term;
• the circumstances under which franchisees may be liable to pay unexpected costs;
• when and how a franchisor is entitled to modify the franchise agreement unilaterally;
• a contact list of existing franchisees in the particular franchise system;
• details of any franchise agreements that the franchisor did not renew in the past three years, and contact details of the respective franchisees of those agreements (if the franchisee did not request anonymity); and
• the franchise agreement in its final form.

In addition, if a franchisor does not wish to give its franchisees the right to renew the franchise agreement, it must include some specified statements in the disclosure document in bold, 12-point font.

What to Do When You Have a Renewal Clause

A franchise lawyer can explain the implications of your franchise agreement’s renewal term. Most franchise agreements contain a condition that outlines the requirements for renewal. For instance, it will likely state that you must comply with the franchise agreement during the initial term. It may also state whether you are or are not in breach of the franchise agreement when you seek renewal. 

Furthermore, the franchise agreement will set out a notice requirement for renewal. The franchisee must notify the franchisor of their intention to renew the agreement within a specific timeframe before the initial term expires. Similarly, most franchisors require franchisees to inform them before expiration. The Franchising Code of Conduct (Code) sets out express notice requirements based on the initial term’s length, but the Franchise Agreement can modify these requirements. 

Suppose a franchisee does not follow the renewal requirements or adhere to the agreement’s preconditions. In this case, the franchisor will have more bargaining power during the negotiation process. Additionally, they may refuse to renew. Therefore, familiarise yourself with the specific terms of your agreement. Both parties should record these notice requirement dates in their diaries to avoid missing them. The wording of the renewal clause may impact the type of franchise agreement that the franchisee will enter into. Thus, it may be helpful to speak with a franchise lawyer about the wording of the renewal clause.

Along with a renewal clause, franchise agreements commonly include a renewal fee that the franchisee must pay upon renewal. The franchisor sets out these fees during the initial signing of the franchise agreement. Franchisees should consider this renewal fee early on and account for it as part of their business expenses, as it can represent a substantial sum. Failing to budget for the renewal fee adequately could strain the franchisee’s cash flow and hinder their ability to renew the agreement when the time comes. Proactive financial planning is crucial for franchisees to set aside sufficient funds to cover this contractual obligation and secure the renewal without undue hardship.

Holdover Period 

If you cannot agree on a renewal to your franchise agreement, a franchise agreement will commonly include a holdover period. H​​oldover periods in franchise agreements allow the franchisee to continue operating the franchised business on a temporary, month-to-month basis after the initial or renewal term expires. This provides flexibility if the franchisee misses the window to renew the agreement properly. During the holdover period, the franchisee is running the business subject to the franchisor’s permission and the original agreement’s terms to the extent applicable.

Typical holdover clauses stipulate that either party can terminate the arrangement by providing 30 days’ written notice. Some holdover periods are also limited in duration, commonly capped at 12 continuous months unless otherwise extended by the franchisor. During this period, the franchisee must follow the franchisor’s reasonable directions, including complying with the Franchising Code. Ultimately, the holdover acts as a cushion for the franchisee to either renew the agreement through proper channels or transition out of the franchise system in an orderly manner.

Issues to Consider

There are several essential issues to consider when considering renewal rights in a franchise agreement, including: 

• the requirements of any renewal clauses;
• the requirement for renewal fees to be paid by the franchisee
• assessing whether the level of disclosure in the Disclosure Documents is sufficient;
• determining whether renewal notifications are in place;
• contemplating any relevant changes made to the standard franchise agreement; and 
• if a renewal provision entitles the franchisor to change the operative terms or make things more demanding on the franchisee (for example, by increasing fees) upon renewal. 

Key Takeaways

Understanding a renewal clause within your franchise agreement is crucial for franchisors and franchisees alike. In short, a renewal term refers to a fixed period after the initial term. Alternatively, when you extend a franchise agreement, the terms and conditions from the original agreement will continue instead of beginning with a new term. When deciding whether you wish to renew your franchise agreement, consulting a lawyer can be especially helpful in ensuring the agreement continues to protect your rights. 

If you need assistance negotiating the renewal terms of your franchise agreement, our experienced franchise lawyers can help. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page.

Frequently Asked Questions