As a franchisee, it can be challenging to exit a franchise agreement while it is still in effect. Nonetheless, franchisors must prepare for this scenario. There are various reasons why franchisees may decide to leave. For instance, they may leave for personal reasons, or their individual franchise outlet may not be making money. Either way, franchisors that fail to abide by the franchise agreement and the Franchising Code of Conduct (‘the Code’) will risk franchisees leaving their business. This article will outline what franchisors can do if a franchisee abandons the business.
As a franchisor, you must not engage in misleading and deceptive conduct. We explain what it is and how to avoid it.
Contact the Landlord
If you have a lease agreement with the landlord – in other words, you are the head lessee – you should contact the landlord as soon as you know that a franchisee is leaving the franchise business. To maintain your lease and avoid termination, you may have to service all leasing financial obligations, including any requirement to maintain trade. Of course, the lease terms and conditions will affect the resolution process. However, it would help if you aimed to address the problem quickly and efficiently.
Furthermore, a Court may look at whether the franchisee has left voluntarily or whether there were other factors in the franchisee leaving the business. In doing so, the Court will take an objective view of the franchisee’s conduct and intention to leave the franchise business.
For instance, the Court may consider whether it is fair for the franchisor to assume abandonment according to the franchisee’s conduct.
Contact the Franchisee
It is good practice not to make assumptions about why the franchisee decides to leave the business, even if it looks like they are abandoning the company altogether. For instance, the franchisee may have fallen ill or experienced an emergency event. However, from a commercial point of view, you should assess the state of the relationship with your franchisee and determine whether you can make any concessions to save the relationship.
Furthermore, you might consider mutually surrendering the agreement. For example, a franchise solicitor can draft a deed that states that each party will surrender the franchise agreement obligations upon some conditional basis. This might include having the franchisee repay any debts they incur. The benefit of reaching an agreement is that you can sometimes avoid the additional costs arising from termination notices.
Continue reading this article below the formTerminate the Agreement
Despite the limitations, it is still possible that a franchisee abandons the business. So, before terminating the franchise agreement, you should make some considerations. For example, confirm whether there has been a breach of the franchise agreement or if the franchising is simply abandoning the business.
Additionally, the Code contains a list of ‘special circumstances’ that allow franchisors to terminate the agreement with just seven days’ notice. If no ‘special circumstances’ exist, but the franchisee’s actions represent a breach of a contractual obligation, you should issue a breach notice.
However, it is essential to note a franchisor may terminate a franchise agreement without written notice at the time of termination. Although, this can only occur if the franchisor and the franchisee mutually agree to the agreement’s termination.
Before terminating the agreement, you should first speak with a franchise solicitor.
Written Confirmation
Once you assess whether the franchisee has genuinely left the business, you should write to notify them of any restraint of trade provisions that may apply under the terms of the Franchise Agreement. You should also outline continuing obligations, particularly confidentiality and intellectual property.
Recuperating Your Losses
In terms of recovering losses, the franchise agreement should provide options for security over the franchisee’s assets or business. To eliminate the level of risk that can occur when a franchisee leaves the business, your franchise lawyer should consider:
- the kind of guarantee agreed upon by both parties;
- whether a ‘first right of refusal’ clause exists; and
- any time limitations if any of these provisions exist.
Key Takeaways
It can be unsettling when a franchisee abandons the business, particularly unexpectedly. If this happens, you should always communicate with the franchisee first to determine the underlying problem.
If you are concerned about your prospects and obligations with franchising, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
If the franchise agreement is for a fixed term and provides no contractual entitlement for a franchisee to terminate unilaterally, then no.
There are different circumstances when you can terminate a franchise agreement. For instance, if there has been a breach by the franchisee. You may also terminate the franchise agreement according to the special circumstances under the Code, including abandonment.
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