Entering a franchise can be a fantastic challenge. It often requires the franchisee to commit themselves to the franchise system for up to 10 years, which is why anyone considering entering into a franchise agreement should first seek legal advice from an experienced franchise solicitor.
But what happens when you no longer want to be involved in the franchise relationship? What happens when you want to “divorce” from your franchisor? Is this even possible? And, if so, under what circumstances can you terminate a franchise agreement?
The Franchising Code of Conduct, known more commonly as the Code, sets out a number of requirements that parties must satisfy when seeking to exit a franchise agreement.
The Code explains the circumstances under which termination of a franchise agreement is possible, including:
- When the franchisee has breached the franchise agreement;
- Special circumstances; and
- Where the franchisee has not breached, but a provision within the franchise agreement allows for termination.
Franchisee has breached
Are you a franchisor? Has your franchisee breached the franchise agreement? When you wish to terminate the agreement following a franchisee’s breach, you are required to provide the franchisee with a reasonable amount of notice. You are also required to inform the franchisee of what they could do to rectify the breach and provide a fair and reasonable period of time for them to address the breach and rectify the situation. Franchisors do not need to give more than one-month notice to remedy the breach.
Provided the franchisee has successfully remedied the breach within the 30 days, you cannot then terminate the agreement because of the breach, except when there is some special circumstance that may apply to the particular breach.
If after this, you and the franchisee still cannot agree on how to proceed, a mediator will be able to assist. If the required ADR methods are useless in reaching some agreement, the two parties should seek independent legal advice from franchise solicitors.
There are certain situations in which the franchisor will have the right to terminate the franchise agreement without providing any opportunity to the franchisee to remedy the breach. It is recommended that you speak with a franchise solicitor, if, and when, your franchisor ends your franchise agreement.
This 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/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 dangerous manner to public health/safety;
- If the franchisee commits fraud in his capacity as franchisee;
- When the franchisee agrees to terminate.
Franchisee has not breached
In some exceptional circumstances, franchisors will be entitled to terminate prior to the expiration date of the franchise agreement, despite the franchisee not breaching or consenting to terminating the agreement.
If a right to terminate without breach exists under your franchise agreement, you should seek legal advice from a franchise solicitor as to the circumstances when this might occur. Franchisors are required to give an explanation to the franchisee as to the reason of termination, along with reasonable notice.
It should be noted that including a clause (whether or not drafted by a franchise solicitor) that allows the franchisor to terminate the franchise agreement without needing the consent of the franchisee will not regarded as adequate consent.
Have a franchise solicitor review the notice period to determine whether it is reasonable or not. 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.
If, as a franchisor, you wish to terminate the agreement without the consent of the franchisee, it is advisable that you seek legal advice from a franchise solicitor, as they will advise what is considered to be reasonable in terms of notice. You should be careful not to act in a way that may be regarded as unconscionable conduct during the termination process.
Keep in mind that proceeding to termination will give the franchisee a right to utilize the dispute resolution procedures that are detailed in Part 4 of the Code.
If you wish to terminate the franchise agreement early, (without there being any breach of the agreement on the part of the franchisee), speak with a franchise solicitor first to get advice on the best way to proceed.