Beyond seriously considering whether you can make the long-term commitment to a franchise, it is essential to have a plan in place to protect you if you would like 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. In this article, we will explain some of the different ways you can end your franchise agreement smoothly.
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. Under the Code, all new franchisees can end the agreement within seven days of:
- signing the agreement; or
- making payment under the agreement.
Once the franchisor receives a cooling-off notice, they must refund all of the franchisee’s payments made under the franchise agreement. The franchisor can, however, retain certain costs that they have reasonably incurred. These include:
- legal fees;
- 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 choose to surrender your franchise to the franchisor, allowing you to exit your franchise agreement. Although the franchisor is under no obligation to agree, they may accept if they are willing to take over the business themselves. Alternatively, they may have a potential franchisee who is ready to take on the business.
If you surrender your franchise business, you may be required to pay an exit fee to the franchisor. In some instances, this fee can be quite substantial. A deed of surrender or deed of release will be used to release you from the franchise agreement.
Selling Your Franchise
Whether you can sell your franchise business to a third party will depend on the terms of your franchise agreement. Some common requirements for selling a franchise business include:
- firstly, providing the franchisor with written notice, including necessary information about the purchaser; and
- secondly, 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 if the purchaser is inexperienced or unable to meet the financial obligations.
If the landlord consents to the sale, it is important to seek legal assistance to prepare the legal documents, 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. In these instances, you will not need the landlord’s consent to exit the franchise 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.
Depending on the nature of the breach, you may be in a position to terminate your franchise agreement. If you believe your franchisor has breached the franchise agreement, seek legal advice about how to proceed.
As a franchisee, you can end your franchise agreement during the cooling off period. Following the cooling-off period, the right to terminate mainly lies with the franchisor. Here, you can terminate the agreement with the consent of the landlord by selling or surrendering your franchise. Finally, if the franchisor breaches the agreement, you may have the right to termination.
If you have any questions, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.
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