This scenario, where a franchisee leaves the business, is not a very common occurrence. Nevertheless, franchisors should be prepared for such a situation. There are a variety of things that can cause a franchisee to pack up and leave. Sometimes it is personal and sometimes it is financial. When a franchisee leaves the business, it can also be because the individual franchised outlet simply failed to make money. Either way, franchisors that are unsupportive or that fail to abide by the terms and conditions of the Franchise Agreement will risk having a franchisee leave the business.
Contact the landlord
If you are the head lessee, i.e. you have a lease agreement with the landlord; make contact as soon as possible with your lessor (the landlord). Notify the landlord as soon as you become aware that a franchisee has left the franchise business. To maintain your lease and avoid it being terminated, you may have to service all leasing financial obligations. Of course, the terms and conditions of the lease will affect how the matter is dealt with; however, the idea is to address the problem expeditiously. Sometimes, there will be a security deposit or bank guarantee that can be used to fund the leasing financial obligations that the franchisee has left you with.
A Court may look at whether or not the franchisee has left voluntarily, or whether there are other factors that pressured the franchisee to leave/abandon the franchise business. The Court will take an objective view of the franchisees conduct and intention for leaving the franchised business.
In other words, was it fair for the franchisor to assume abandonment based on the conduct of the franchisee? What should be implied from their actions? Has there been any indication, to you or another party, that the franchisee has stopped operating the franchise business? All of these factors are very important when considering the reason as to why the franchisee left the business.
Contact the franchisee
Why did the franchisee leave the business? It is better practice to make no assumptions, even if it appears to look like the franchisee has abandoned ship completely. For all you know, there has been an emergency event, or the franchisee has fallen ill. From a commercial point of view, you should assess the state of the relationship with your franchisee and determine whether any concessions can be made to save the relationship. Have you thought about mutually surrendering the agreement? A franchise solicitor can draft a Deed that states that each party will surrender the obligations of the Franchise Agreement upon some conditional basis, such as having the franchisee repay any debts it has incurred. The benefit of reaching some sort of agreement is that sometimes the additional costs that arise from termination notices can be avoided.
Terminate the Agreement
Under clause 29, section 1(d) of the Franchising Code of Conduct, you are entitled to terminate the Agreement if you believe the franchisee has actually left the franchise and has no intention of returning. Before you proceed to termination, it is advisable that you speak with a franchise solicitor first.
Once you have made the assessment that the franchisee has truly 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.
Recuperating you losses
In terms of recovering any of the losses that flow-on from a franchisee leaving the business, the Franchise Agreement should provide options for security over the franchisee’s assets or business. What kind of guarantee was agreed to? What about a ‘first right of refusal’ clause? If any of these provisions have been considered, what are the time limitations under which they operate? Your franchise lawyer should be considering all of these scenarios to eliminate the level of risk of loss that can occur when a franchisee leaves the business.
Amendments to the Franchising Code of Conduct
Do not forget that there are amendments to the Code that have become effectual as of 1 January 2015. There are several important changes that will impact Franchisors, including ‘good faith’ obligations and variations of the right to terminate a Franchise Agreement. For more information on what effects the changes to the Code will have, contact your franchise lawyer.
If you have a franchisee that has left the business without any notice, and you are worried that they have no intention to return, you should speak with a franchise lawyer about your options. Get the right legal advice from LegalVision’s team of franchise lawyers, and get in touch on 1300 544 755.