How Do You Terminate a Franchise Agreement?

In Short:

• The Franchising Code of Conduct outlines when and how a franchise agreement can be terminated.
• Termination can occur due to breach, special circumstances, or specific provisions within the agreement.
• Both franchisors and franchisees have rights to request or dispute termination under regulated conditions.

Tips for Businesses:

Before entering or terminating a franchise agreement, carefully review the terms, especially regarding breaches, special circumstances, and termination clauses. Ensure both parties understand their rights and obligations. If termination is being considered, seek legal advice to navigate the process smoothly and avoid potential disputes or legal issues.

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Table of Contents

• The Franchising Code of Conduct 
• Breach by Franchisee 
• Special Circumstances
• No Breach of Franchise Agreement
• Key Takeaways
• Frequently Asked Questions 

Entering a franchise can be a fantastic challenge and a rewarding business decision. Often, it involves the franchisee committing to the franchise business for a set period and might pay substantial initial fees. As a result, you may face challenges in terminating the agreement if you no longer wish to be involved in the franchise relationship. This article will explore the various options available if you wish to terminate a franchise agreement. 

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The Franchising Code of Conduct 

Entering a franchise agreement is a big commitment. For this reason, the Australian Competition and Consumer Commission (ACCC) provides regulations that govern franchise operations in Australia. The Franchising Code of Conduct (the Code), sets out several requirements that parties must satisfy when seeking to exit a Franchise Agreement.

The Code explains the circumstances under which the termination of a franchise agreement is possible, including:

• when the franchisee breaches the franchise agreement;
• special circumstances; and
• where the franchisee does not breach the agreement, but a provision within the agreement allows for termination.

Breach by Franchisee 

When the franchisee breaches the franchise agreement, the franchisor must provide the franchisee with an opportunity to rectify the breach before terminating the agreement. You must allow the franchisee a fair and reasonable period to rectify the situation when providing this opportunity. Additionally, as a franchisor, you must inform the franchisee of what they should do to rectify the breach. This will often include providing details on how they breached the agreement.

If the franchisee successfully remedies the breach within a reasonable time, the franchisor cannot terminate the franchise agreement due to a breach.

Alternatively, the franchisee may dispute the breach. In this case, they can issue a dispute notice, which obligates the parties to the franchise agreement to seek to rectify the dispute in good faith for 21 days. If the franchisor and franchisee cannot agree on how to proceed after this, you may refer to alternative dispute resolution (ADR). 

Special Circumstances

There are specific circumstances where the franchisor may have the right to terminate the agreement with only seven days’ notice to the franchisee. 

Special circumstances can occur in the following situations:

• when the franchisee does not hold the relevant licence to operate the franchise;
• when the franchisee can no longer afford to operate the franchise or the company operating the business becomes insolvent;
• when the franchisee leaves the franchise and ceases to carry out the duties of the franchise agreement;
• when the franchisee is convicted of a serious offence;
• if the franchisee is operating the franchise in a manner dangerous 
• to public health or safety;
• if the franchisee commits fraud in his capacity as a franchisee; or
• when the franchisee agrees to terminate the franchise agreement.

No Breach of Franchise Agreement

In some exceptional circumstances, franchisors may terminate the franchise agreement before the expiration date, despite the franchisee not breaching or consenting to terminate the agreement.

If a right to terminate without breach exists under your franchise agreement, you should seek legal advice from a franchise solicitor to understand the circumstances when this might occur. 

You should note that a clause allowing the franchisor to terminate the agreement without the franchisee’s consent will not be regarded as adequate consent. This is the case whether a franchise solicitor drafts the clause or not. Further, a court may disregard the proposed notice period if they determine it to be unreasonable or inadequate, irrespective of the terms of the franchise agreement. In this case, the court may claim unconscionable conduct during the termination process. 

According to recent updates to the Code, franchisees may request the early termination of their franchise agreement by issuing an early termination request. If the franchisor receives such a request, it must respond and outline any reasons for refusal. 

Finally, it is not uncommon for the parties to a franchise agreement to agree to terminate it. In this case, it is generally best to document such an agreement by way of a deed of settlement and release. Again, you should consult a franchising lawyer to assist with this process. 

Key Takeaways

There are heavy regulations that govern franchising in Australia. Therefore, it is essential to ensure you are meeting your obligations as both a franchisor and a franchisee. So, if you are a franchisor or franchisee, you might consider investing in legal advice before signing the franchise agreement. 

If you wish to terminate your franchise agreement, our experienced franchising 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