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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 and how they should notify the franchisor of the exercise of that right. So, consider 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) and, if so, 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 what a renewal clause is within your franchise agreement and help you consider whether renewing or extending is the right option for you. 

Renewal vs Extension

Before we consider what a renewal clause is, 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 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 that 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. 

Indeed, Australia’s contract principles influence its position. Additionally, this perspective reflects the franchise law within the United States. Essentially, a fixed term is a term with a start date and an end date for which a contract (i.e. the franchise agreement) will operate. Furthermore, after the end date, the franchisee’s rights within the franchise agreement will automatically cease. This includes the right to exploit the franchisor’s IP and operate the franchised business.

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 prior to:

  • entering;
  • continuing; or
  • renewing.

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 their franchisees the right to renew the franchise agreement, they must include the following statement in the disclosure document.

“The franchisee does not have the option to renew the franchise agreement. At the end of the franchise agreement, the franchisor may, but does not have two, extend the term of the agreement. If the franchisor does not extend the term of the agreement, the franchise agreement ends and the franchisee no longer has the right to carry on the franchised business.”

Furthermore, they must present this statement in size 12 font and bold. 

What to Do When You Have a Renewal Clause

A franchise lawyer can explain the implications of your franchise agreement has a 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 and/or are not in breach of the franchise agreement when you seek renewal. 

Furthermore, the franchise agreement will set out the ‘window’ to notify the franchisor of your intention to renew. 

For example, the following statement; ’at least nine months but not less than three months before the end of the initial term,’ provides the franchisee with a six month renewal window.

Suppose a franchisee does not follow the renewal requirements or adhere to the franchise agreement’s preconditions. In this case, the franchisor will have more bargaining power during the negotiation process. Additionally, they may refuse to renew. 

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.

Issues to Consider

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

  • the requirements of any renewal clauses;
  • 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 the effect of a renewal provision is to entitle the franchisor to change the operative terms or make things more demanding on the franchisee (for example, by increasing fees) upon renewal. 

Franchisor Financial Disclosure Factsheet

This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.

Download Now

Key Takeaways

Ultimately, 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 on instead of a new term beginning. When it comes time to decide 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

Are franchise agreements automatically renewed?

No, there is no automatic right to renewal unless the franchise agreement or the disclosure document specifies it.

As a franchisor, do I need a renewal clause?

No, you do not need a renewal clause. However, the disclosure document must specify that you do not grant any rights to franchisees for a renewal of the franchise agreement at the end of the initial term.


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