Most franchise agreements operate for a fixed term, where each party must carry out their obligations. The Franchising Code of Conduct (the Code) allows franchisees to terminate their franchise agreement in specific situations. Your franchise agreement should outline the circumstances for termination. However, even in unspecified circumstances, the Code will still apply. This article will explore the various situations where you can cancel a franchise agreement.
This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.
Cancellation During the Cooling Off Period
As a franchisee, you will endure a cooling-off period after you enter a new franchise agreement. Franchisees are entitled to terminate a new franchise agreement within 14 days of entering the agreement. This cooling-off period starts from the earlier of:
- signing the franchise agreement; or
- payment of the initial franchise fee.
If you cancel your franchise agreement within the cooling-off period, you are entitled to a full refund within 14 days of exercising. However, the franchisor can keep the money if:
- it is included in the franchise agreement; and
- the money is for reasonable expenses.
Early Termination
According to the Code, franchisees have the right to give a written proposal to terminate a franchise agreement early (at any time).
This proposal must give reasons for cancellation. The franchisor then has 28 days to provide a substantive response to the proposal. If the franchisor does not agree to accept the franchisee’s proposal for early termination, it must give reasons for its refusal.
As such, while this early termination proposal does not guarantee a cancellation of your franchise agreement, it does open the conversation for such cancellation or another satisfactory resolution.
Continue reading this article below the formCancellation Due to Breach
You may have grounds to cancel your franchise agreement if the franchisor fails to fulfil its obligations under the Code. However, this is a grey area, and you should seek legal advice specific to your circumstances. Examples of these obligations under the Code include:
- acting in good faith – an overarching obligation under the Code; and
- information disclosure – for example, if the franchisor fails to disclose the required information (including the disclosure document).
Typically, these Code breaches only allow a franchisee to terminate their agreement if they can prove the franchisee would not have entered the franchise agreement had the breaches not occurred. This is ultimately a matter for a court to determine.
Termination as a Contractual Right
Finally, while most franchise agreements are for a fixed term, some franchisors include a right of termination on the notice provision. If you are considering terminating, thoroughly examine your franchise agreement first.
Obligations Post Termination
If you decide to cancel your franchise agreement, you should refer to your franchise agreement to understand your ongoing obligations and the ‘post termination’ process. This process will usually involve the return of franchisor equipment, provision of log-in details etc. Further, you will usually have continuing obligations after the Franchise Agreement has been terminated. For example, franchise agreements commonly include a restraint of trade clause. This clause restricts your ability to carry on similar businesses in defined areas and for defined periods. In addition, most Intellectual Property and Confidential Information clauses will survive termination. As such, you must still abide by your obligations post-termination concerning these matters.
Key Takeaways
Cooling-off periods per Code allow you to cancel your franchise agreement soon after signing. However, after the cooling-off period, you can usually only cancel your franchise agreement with the franchisor’s consent or where the franchisor breaches an important term. If you are looking to exit your franchise agreement, contact our specialist franchising lawyers. We will consider your franchise agreement and circumstances to advise you of your rights.
If you wish to terminate your franchise agreement, 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
The Franchise Agreement is a contract. Therefore, if the franchisor breaches an essential agreement term, this could give you grounds for terminating the Franchise Agreement.
According to the Code, franchisees have the right to give a written proposal to terminate a franchise agreement early (at any time). This proposal must give reasons for cancellation. The franchisor then has 28 days to provide a substantive response to the proposal. If the franchisor does not agree to accept the franchisee’s proposal for early termination, it must give reasons for its refusal.
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