In Short
Franchise agreements usually set out when and how a franchisor can terminate the arrangement. A franchisor must comply with the agreement and the Franchising Code of Conduct, including notice and procedural requirements. If termination is not handled properly, it can lead to disputes, compensation claims and regulatory risk.
Tips for Businesses
Review your franchise agreement and the Franchising Code of Conduct before taking steps to terminate. Check the grounds for termination, notice periods and any rights to remedy breaches. Keep clear records of non-compliance and communications with the franchisee. Ensure you follow a fair, documented process and seek advice where obligations are unclear.
Summary
This article is a guide for Australian franchisors on termination rights under franchise agreements and the Franchising Code of Conduct. LegalVision’s business lawyers explain the legal framework and practical considerations; LegalVision, a commercial law firm, specialises in advising clients on franchising and commercial law matters.
Deciding to operate a franchise can be an excellent way to run a business with an established brand and reputation. After meeting with the franchisor and signing the franchise agreement, there may be times when you are unsure of your decision. Running a franchise is a significant commitment. Even though you have already signed the franchise agreement, you may still have options to leave without attracting legal penalties. This article explores the termination and cooling-off rights of a franchisee.
Do You Have a Cooling-Off Period?
A franchising agreement is a legally binding contract. Once you sign the agreement, you are bound by its terms. However, most franchise agreements will include a cooling-off period, where you can exercise your right to terminate the agreement. This gives you an opportunity to really think about whether being a franchisee is what you really want.
A cooling-off period is a specific time period within which you may exercise your right to terminate the franchise agreement. The Franchising Code of Conduct (“Code”) will allow franchisees to terminate the agreement within 14 days. It is very important to note that these 14 days start from the earlier date of:
- signing the franchise agreement; or
- paying the initial franchise fee to the franchisor.
If you decide to terminate your franchise agreement within the 14-day cooling-off period, the franchisor is required by the Code to refund your franchise fee payment. Importantly, franchisors can deduct reasonable expenses from this refund. However, for them to do this, they must state the reasonable expenses or their method of calculation in the franchise agreement. The franchisor will have 14 days to refund the franchise fee payments to you or risk legal penalties.
Do You Have Any Remaining Obligations?
Although you would expect your freedom after terminating the franchise agreement within the cooling-off period, it is not as easy as that. You will be released from most of your obligations but may still be subject to certain legal obligations under the franchise agreement. These might include clauses concerning restraint of trade, confidentiality provisions and the intellectual property rights of the franchisor. These clauses generally survive the termination of a franchise agreement.
Ensure you understand your obligations surrounding non-disclosure of the franchisor’s confidential information and are aware of the franchisor’s intellectual property rights so that you do not breach these obligations. If you are unsure of what your obligations are and how they apply to you, it is a good idea to get in touch with a franchise lawyer to have these issues explained to you in detail.
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What if the Cooling-Off Period Has Passed?
If you have been operating the franchise business for more than 14 days, closely review the terms of the franchise agreement to figure out what your options are regarding termination.
A possible scenario may be where you have operated the franchise business for a few years and are no longer able to commit the time and resources to maintaining the business. Neither you nor the franchisor have breached your obligations under the agreement, but you would like a change of scenery and would like to stop operating the franchise business.
Since 2021 there have been changes to the Code allowing franchisees to terminate their franchise agreement via a written notice at any time to the franchisor. There are no limits on what reasons the franchisee may have to terminate. Once the franchisor receives this notice, they have 28 days to provide a substantive written response to the proposal, to which good faith obligations will apply. If the franchisor does not agree to the termination, they must include their refusal reasons. If there is disagreement between the parties, the usual dispute process within the Code will apply.
What Are Your Options?
The terms of the franchise agreement itself and the Code will largely determine your options. It is a good idea to get a franchise lawyer to review your agreement to determine the best options for you according to the agreement and general franchising law.
Ask yourself the following general considerations:
- Are there terms in the franchise agreement outlining in what circumstances you can terminate the agreement? If so, do these circumstances relate to your current situation?
- Would you consider selling the franchise business? If so, consider the transfer and assignment clauses in your franchise agreement.
- Have you written a termination notice to the franchisor advising them of your intention to terminate the franchise agreement? Have they responded to this notice?
- Are you in a dispute with the franchisor? If you want to terminate the contract because of a dispute with the franchisor, you may need to undergo dispute resolution procedures.
This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.
Key Takeaways
The cooling-off period of 14 days allows certain franchisees to exit a franchise agreement without legal penalties. This only applies to new franchisees entering into franchise agreements or existing franchisees transferring their franchise business. Generally, it is quite difficult for a franchisee to terminate a franchise agreement after the cooling-off period. This is because the franchisor would have invested considerable time and expenses in training and setting up the franchise business for you to operate. As such, closely review the franchise agreement before signing it rather than solely relying on the cooling-off period to terminate the agreement.
LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced franchise lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.
Frequently Asked Questions
The Franchising Code of Conduct provides that you cannot sign the franchise agreement for at least 14 days after you have received it. Therefore, you have a 14-day cooling-off period from the date of signing the franchise agreement or payment of the franchise fee.
The cooling-off period only applies to new franchisees as well as transfers of franchise businesses.
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