In general, the franchise agreement runs for a fixed term and expires on a specific date, and franchisees will need to be aware of their obligations for de-fitting the premises before they vacate the site of the franchised outlet.

One of these obligations is for the franchisee to pay to have the site de-fitted. You might remember that part of the make good provisions of a commercial lease include leaving the premises in the state in which it was delivered. Even if the franchisor is the lessee to the landlord, the franchisee will have probably signed a licence to occupy, and is likely to be bound, in some way, to the terms of the lease.

Franchisor obligations at the expiry of the franchise agreement

A common misconception amongst franchisees that are nearing the end of their franchise agreements is that they have no responsibility to de-fit the premises or that the franchisor will buy most of the equipment from them at the expiry of the franchise agreement. Another misconception is that the franchisor will purchase the business from the franchisee, or at the very least purchase the existing fit-out from them. Franchisors have no obligations to do so, unless the terms of the franchise agreement stipulate that they do.

It is important that franchisees consider the fact that franchisors may not want to buy the business, its equipment or pay any money whatsoever; no matter how successful the business has been in that particular site. It is not common for a franchisor to pay the market value of a business, including its goodwill. It is possible that the franchisor will pay market value for the equipment but because it is second-hand, its value will have dropped dramatically, despite how expensive it may have been to install.

While it is possible that a franchisor will buy the equipment at market value, or even the business itself, franchisees should assume that the obligation to de-fit the premises and take preparatory steps. It is also possible that the landlord will ask the franchisee to leave the fit-out for the next tenant to enjoy, however, this is rare.

Obligation to de-fit the premises

The process of de-fitting the premises involves stripping all fixtures from the business and returning it to its original condition (i.e. the condition of the premises at the beginning of the lease). The premises should be emptied and cleaned, ready for new tenants.

Failure to de-fit the premises in accordance with the terms of the lease can result in the landlord seeking damages that allow the landlord to recover all reasonable costs to make good the premises. Make sure you know what condition the property is in at the commencement date of the lease.

De-badging and Restraint of Trade

At the expiry date of the franchise agreement, the franchisee is required to remove any identifying signage, such as the trademarks that were used to identify the franchise business. It is common for franchisors to inspect the premises after the de-branding process to make sure no signage remains. Remember that, as a franchisee, you be refrained from using the premises to run a business that will compete with the franchise business.

Franchising Code of Conduct

Franchisees will have advanced notice when the franchise agreement is not going to be renewed and they will be required to de-fit the premises. Under the Code franchisors must provide six months or longer notice before the end of the franchise agreement that informs the franchisee as to whether or not the agreement will be renewed.

Conclusion

Prior to entering into a franchise relationship, franchisees should consider their de-fit obligations in the franchise agreement. Here at LegalVision, we provide legal assistance to landlords, franchisors, and franchisees, helping them to understand their obligations and rights under the make good provisions of the lease.

Priscilla Ng

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