As you establish your franchise, it is essential to consider the length of the term that you will offer to franchisees. The reality of franchise relationships is that circumstances may change after the franchise agreement is signed. As the franchisor, this may mean that you will want to terminate a particular franchise agreement before the expiration of the relevant term.

The franchise agreement is essentially a contract between yourself and the franchisee, and accordingly, your rights to terminate will be determined by basic contract law principles, such as whether there:

  • has been a breach of an essential term; and
  • is an express provision entitling termination in the franchise agreement itself.

The Franchising Code of Conduct (the Code), however, also imposes certain restrictions as to when you can terminate. This article will outline when and how a franchisor can terminate a franchise agreement before the expiration of the term.

Termination of Contract

You cannot terminate merely because you want to. The termination must come about because you have a:

  • contractual right to do so; or
  • basis of termination available at law.

Here, the first things ask are:

  1. has the franchisee breached the franchise agreement? If so, is there a clause outlining must happen in the event of a breach?; or
  2. is there a right of termination at law. Has the franchisee breached an essential term of the contract, repudiated the contract or is the franchise agreement unable to be performed?

If the answer to both of these questions is ‘no’, it is unlikely that you will be able to terminate the agreement.

Franchising Code of Conduct

The Code does not explicitly provide franchisors with a right to terminate the franchise agreement, but it does impose some practical obligations for when franchisors rely on a contractual right of termination.

If there is an inconsistency between the franchise agreement and the Code, the Code will apply. These practical requirements of the Code are usually, but not always, reflected in provisions within the franchise agreement.

Breach by Franchisee

Where a franchisee has breached their obligations under the franchise agreement, you will be able to terminate the agreement before the end of the term. However, this is subject to limitations. Some breaches – such as fraud or becoming bankrupt – entitle the franchisor to terminate immediately under the Code, provided the franchise agreement contains a clause reflecting this entitlement.

If the franchisor intends to rely on a breach to terminate, the franchisor must notify the franchisee of the following:

  1. the nature of the breach;
  2. their intention to terminate the agreement due to the franchisee’s breach; and
  3. what the franchisee must do to remedy the breach and by when.  

You can communicate these details to the franchisee in the form of a breach notice. Typical examples of a breach which can justify the issue of a breach notice include:

  • non-payment of franchise fees;
  • failing to meet minimum performance criteria; and
  • failing to meet continuing training or service standards.

You can ensure that you are ready to proceed to the next step by issuing a breach notice. A franchise lawyer can assist with preparing and issuing a breach notice to the franchisee on your behalf.

If the franchisee rectifies the breach in the manner required in the breach notice and in a reasonable amount of time, you cannot terminate the agreement.

Dispute Resolution

If you think a franchisee will dispute the termination, it is essential to ensure that you attempt to resolve the dispute following the dispute resolution processes contained in your franchise agreement and the Code.

The Code also contains an obligation to act in good faith. If you do not have a dispute resolution process set out within your franchise agreement, the dispute resolution framework set out in the Code will apply.

Key Takeaways

As a franchisor, there are limited instances in which you can terminate a franchise agreement before the end of the term. If you do decide to terminate – for example, if the franchisee breaches a term of the agreement – there are specific procedures that you need to follow, including issuing a breach notice.

Ultimately, you should ensure that you follow the procedures set out in the Code and your franchise agreement. 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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