As a franchisor, managing your franchisee network can be time-consuming. Keeping track of franchisee agreements as they progress and mature, especially as they reach the end of their terms, can be particularly demanding. If you are not proactive, you may have to comply with strict deadlines and additional legal obligations. This article will explain:

  • what your franchisor obligations are at the end of a franchise term; and 
  • why it is important to plan ahead if your franchisee is in a holding over period.

What Happens at the End of the Term?

There are several possible outcomes at the end of the term of a franchise. Depending on what you included in your franchise agreement and disclosure document, you may have the choice to:

  • end the current agreement;
  • renew the agreement for an additional term;
  • extend the current agreement for an agreed period; or
  • put the franchisee into a holding over period.

Ending the Current Agreement

Under Australian franchising law, part of your franchisor obligations at the end of a franchise term is that you can decide on the length of the franchise term for your franchise network agreements.

For example, you could choose a franchisee’s term to be one or three years.

This is regulated by the franchising code of conduct. You do not have to provide an automatic right to renew the franchise. This means that when the franchise agreement term ends, the relationship can. You do not need to provide reasons for not continuing.

However, if your disclosure document gives your franchisees a right to renew, then you must follow the agreed procedure.

 Your franchise agreement may be for a fixed period of time. If so, you can enter into a new franchise agreement with a (now) former franchisee. However, you may have to provide the franchisee with the relevant documents for a new franchisee.

Renewing the Agreement for an Additional Term

The franchisee may have an optional right to renew the franchise for another term. Therefore, they will need to follow the steps outlined in the disclosure document. This is so both you and the franchisee know what to expect at the end of the term. It also means that you are both aware of your rights. This often involves the franchisee notifying you as to whether they want to renew the franchise within a certain timeframe.

Many franchise agreements have a term known as ‘5 x 5’. This which means an initial term of five years and an option to renew the term for an additional five years. 

Your franchisor obligations at the end of a franchise term means that you may also have set out certain requirements that the franchisee needs to comply with before they can renew the agreement. These requirements may include: 

  • correcting any breaches of the franchise agreement;
  • not exceeding the maximum number breach notices allowed;
  • paying a ‘renewal fee’ or any outstanding amounts; or
  • meeting business performance requirements.

The franchisee may also want to negotiate terms of the renewal with you. You do not have to accept any negotiated arrangements. However, there are franchisor obligations at the end of a franchise term that all franchisors have to follow. This means you must act reasonably and in good faith when making your decision about renewal.

Extending the Current Agreement for an Agreed Period

There are a few differences between a renewal and an extension:

 

Difference

Renewal

Extension

Purpose

You have already decided to renew the term with a longer-term focus and want the franchisee to continue for the renewed term.

You have not decided what you want to do with the franchise in the long-run and you need time to make a longer-term decision, but need the franchisee to continue for now.

Term

Renewal is often for the same initial term, and is determined by the franchise agreement and disclosure document. However, the renewal period can be different if agreed upon by both parties.

You and the franchisee will agree on the extension period in writing. Typically, this will be a few months or a year. However, as a franchisor, you have more decision-making power  when it comes to deciding on the extension.

Negotiations

The franchisee might seek to negotiate terms with you to alter the arrangements.

During an extension, it is more common for the current agreement to continue without changes.

Notice

If the franchisee wants to renew the agreement, they must give you notice within the set time frames specified in the franchise agreement.  Regardless, you need to give the franchisee notice whether you intend to renew or not at least six months prior to the end of the term. 

If you want to extend the franchise term, you must provide notice to the franchisee. Under the franchise code, this is usually at least six months before the end of the term. However this requirement is reduced for franchises with initial terms under six  months.

You may decide to renew or extend the franchise term. If so, an updated disclosure document must be given to the franchisee. Other documents that must be given include a copy of the franchise agreement and the franchising code. This must be given to the franchisee at least 14 days before renewal or extension.

Put the Franchisee Into a Holding Over Period

A holding over period allows the franchisee to continue operating the franchise on a weekly or monthly basis. This is used as a short term arrangement, and your franchise agreement may have a provision that specifically allows you to have a franchisee in holding over. 

This occurs when the initial or renewed term of the agreement expires but the franchisee continues to operate because you have not: 

  • stopped them; or
  • explicitly extended or renewed the agreement.

Holding over often allows for a shorter notice period to end the franchise. 

For example, if the arrangement is month to month, the notice period to end the franchise may be one month’s notice. This is the case unless it is stated otherwise in the franchise agreement. 

Therefore, it is best practice to provide a notice of holding over to the franchisee for best clarity on your obligations and their rights in this situation.

There may be times where your franchise agreement does not include such a provision. Therefore, in these situations, you should have a written agreement with each franchisee agreeing to the terms of the holding over period. 

What Should I Include in a Notice or Agreement?

An agreement or notice regarding holding over should cover key terms, such as:

  • the franchisee continuing to operate the franchise;
  • the period (for example, week-to-week or month-to-month);
  • the notice for ending the holding over arrangement (usually the length of one period);
  • what happens at the end of holding over;
  • continuation of other terms in the franchise agreement; and
  • a statement that this written notice takes precedence over terms in the franchise agreement.

The franchisee should sign and return the agreement as a written legal record. A notice should refer to the relevant provision in the franchise agreement to bring it to the franchisee’s attention.

What Issues Can Arise During Holding Over?

A holding over period can be difficult to manage. It is important to be aware of the legal consequences of having a franchisee in holding over. Questions that you could be asking yourself include whether:

  • you have tried to stop the franchisee trading under your franchise;
  • having them in a holding over period breaches the franchise agreement;
  • a relevant lease exists that could be impacted;
  • you have renewed or extended the franchise agreement by proposing a period of holding over;
  • you have met your disclosure obligations under the franchising code of conduct;
  • any franchise agreement terms have changed, and whether the franchisee operate differently as a result; and
  • you had discussions with the franchisee before the term of the agreement expired.

The issues arising in a holding over period are different in every franchise agreement. Therefore, the action you take will depend on:

  • what was agreed between you and the relevant franchisee;
  • communications between you regarding continuation; and
  • the conduct of you and the franchisee.

If a dispute arises, it is important to consider those events that occurred both before and after the term expired.

Key Takeaways

As a franchisor, it is important to plan ahead as the terms of your franchisees come to an end. This is so you can be aware of:

  • your obligations to end, renew or extend the franchise;
  • the deadlines for you and the franchisee to communicate with each other regarding the continued operation of the franchise;
  • any approvals you need to make as a franchisor; and
  • your obligations to act in good faith and reasonably during renewal.

It is also important to be aware of provisions in your franchise agreement and disclosure document regarding renewal, extension and holding over. This will allow you to act appropriately in making any changes in your franchise agreement. It will allow you to take steps to transition the franchisee at the end of a franchise term. If you have any questions about what to do before and at the end of the franchisee’s term, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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