Renewing a franchise is an area of franchise law that has caused much disagreement amongst franchisors and franchisees, particularly in relation to the ‘then current franchise agreement’ clause. This clause permits the franchisor to update the agreement at any stage prior to renewal. A franchise solicitor can give you professional advice on how to manage this risk when dealing with a franchisor.
There is not a whole lot of case law in Australia around this controversy, as most matters have been settled before reaching the Courts. Having said that, class actions of franchisees are becoming more common. For this reason, a franchise solicitor should be consulted before entering any agreements.
Australia’s current position
Currently, no automatic renewal rights exist in a franchise agreement. In the same vein, no legislation dictates how renewal clauses are to be drafted. This means that a franchise agreement that does not provide for any renewal will expire upon the end date of the term of the franchise agreement. On this date, the franchisee is taken to know that their rights with respect to the franchise will come to an end without interference from the law.
This position is largely based on Australia’s contract principles, as well as our similar stance on franchise law to the United Sates. Franchise relationships involve expenditure on both ends. Franchisees have ongoing fees and make contributions to a Marketing Fund, whereas franchisors spend money to continue to build up their intellectual property (“IP”). As this IP is the primary asset of any franchisor, the law tends to respect the right to cease allowing use of their IP by a franchisee.
Can you imagine if franchisors were made to forfeit their IP rights? It would be pandemonium. It could lead to increased initial fees or result in less companies willing to expand through franchising.
Our government has placed its focus on heightened disclosure requirements to any current or prospective franchisees. This has enabled franchisees to be informed prior to entering, continuing, renewing, or engaging in discussions about, a franchise agreement.
There are several things that must be disclosed before a franchise agreement is renewed or entered into, including:
- What is to happen at the end of the term;
- Under what circumstances franchisees may be liable to pay unexpected costs;
- When and how a franchisor is entitled to unilaterally modify the franchise agreement;
- Contact list of existing franchisees in the particular franchise system;
- Details of any franchise agreements that were not renewed in past 3 years and contact details of the respective franchisees of those agreements (provided franchisee has not requested anonymity); and
- The franchise agreement to be in final form
If you are still unsure of your disclosure rights, speak with a franchise solicitor.
What to do when you have a Renewal Clause
If your franchise agreement has a renewal term, a franchise solicitor should explain its implications. As a franchisee, to benefit from a renewal clause you must comply with the franchise agreement in its entirety. If you do not follow the requirements set out in the franchise agreement, the franchisor will have more leverage or bargaining power during the negotiation process.
The wording of the renewal clause may impact on the type of franchise agreement that the franchisee may enter into. Speak with a franchise solicitor about the wording of the renewal clause, as this will impact the type of franchise agreement you enter into.
Issues to consider
There are a number of important issues to consider when a franchise solicitor is reviewing your franchise agreement’s renewal clause, including:
- Looking at previous drafting of 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. Franchisors should be careful about not informing prospective franchisees of any ‘substantial’ changes;
- Whether the treatment of one franchisee has been consistent with others franchisees in the same system; and
- Staying abreast of developments in franchise law
Franchise solicitors are invaluable when it comes to negotiating the terms of the franchise agreement. For more information regarding the rights and responsibilities of both franchisors and franchisees, contact LegalVision and speak with an experienced franchise solicitor.