In Short
- Franchisees can terminate a new franchise agreement within 14 days under the cooling-off period, but franchisors may deduct reasonable expenses.
- Termination may also be possible if the franchisor breaches essential terms of the agreement or if both parties mutually agree to end it.
- Franchise agreements may include specific termination clauses, such as exit options upon payment of a fee or under certain conditions.
Tips for Businesses
Before signing a franchise agreement, carefully review termination options. Understand the cooling-off period, negotiate exit clauses, and be aware of the franchisor’s rights under special circumstances. Legal advice can help clarify these details and ensure you’re prepared for all eventualities.
Beyond seriously considering whether you can make a long-term commitment to a franchise, it is essential to have a plan to protect you if you want to end the franchise agreement early. Because the Franchising Code of Conduct (the Code) does not provide franchisees with many options for early termination, you will likely require an express term in your franchise agreement.
Ultimately, this will help you avoid unnecessary and costly disputes. This article will explain some of the different ways you can end your franchise agreement smoothly.
When bringing on board new franchisees, it is important to negotiate agreements that strike a balance. This factsheet explains how.
Cooling-Off Period
If you change your mind shortly after entering into the franchise agreement, you can exit the agreement early by relying on the cooling-off period. The cooling-off period does not apply to the renewal, extension or transfer of existing franchises where a new franchise agreement is not entered into between the transferee and the franchisor. Under the Code, all new franchisees can end the agreement within fourteen days of:
- signing the agreement; or
- making payment under the agreement.
Once the franchisor receives a cooling-off notice, they must refund the franchisee’s payments made under the franchise agreement. However, if the franchise agreement sets out any reasonable retainable costs, the franchisor can retain certain reasonably incurred costs. These may include:
- training costs; and
- administrative expenses incurred to recruit the franchisee.
As a franchisee, you must comply with the termination clause of the franchise agreement, which will involve:
- returning any manuals and intellectual property;
- transferring the business name to the franchisor; and
- complying with any restraints under the agreement.
Surrender Your Franchise
You can surrender your franchise to the franchisor, allowing you to exit your franchise agreement. Although the franchisor is not obligated to agree, they may accept if willing to take over the business themselves. Alternatively, they may have a potential franchisee who is ready to take on the business. As the franchisor does not have to agree to any such surrender, such a surrender would generally be negotiated directly between the parties and, in most cases, require you to make payment of a surrender fee to the franchisor.
Continue reading this article below the formSelling Your Franchise
Whether you can sell your franchise business to a third party depends on your franchise agreement’s terms. Some common requirements for selling a franchise business include:
- providing the franchisor with written notice, including necessary information about the purchaser; and
- obtaining the consent of the franchisor.
Once you have provided the franchisor with all the necessary information, they must not unreasonably withhold consent. This said, a franchisor may withhold consent in many circumstances, including if the purchaser is inexperienced or unable to meet financial obligations.
If the landlord consents to the sale, it is essential to seek legal assistance to prepare the legal documents required, such as:
- the sale of business agreement; and
- a deed of termination with the franchisor.
Breach by the Franchisor
There may be circumstances where the franchisor breaches an essential term of the agreement.
If the franchisor breaches an essential term, you should:
- provide written notice to the franchisor about the breach; and
- follow the dispute resolution process set out in your agreement.
Key Takeaways
As a franchisee, there are minimal circumstances in which you can terminate your franchise agreement without the franchisor’s consent. If you are seeking to terminate a franchise agreement, it is essential you seek legal advice to explore any avenues available to you and the best option for terminating your franchise agreement.
If you have any questions, our experienced franchise lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Yes, new franchisees can exit within 14 days of signing the agreement or making a payment. The franchisor must refund your payments, but they may deduct reasonable costs like training or administrative fees.
No, the cooling-off period only applies to new franchise agreements. If you are renewing, extending, or transferring an existing franchise, this right does not apply.
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