Franchise agreements typically have a fixed term and expiry date. In other words, they are finite and do not automatically renew, unless the terms of the Franchise Agreement allow this. To renew the franchise agreement, and avoid the franchise relationship coming to an abrupt end, you’d be wise to pay close attention to the procedures set out in the terms of the Franchise Agreement.
The terms of the Franchise Agreement
First of all in the list of things to remember to renew the franchise is to look over the terms of the renewal procedure set out in the Franchise Agreement.
What steps need to be taken? Is the franchisor required to give you notice if they do not wish to offer you the opportunity to renew the franchise?
These are important details that are specified in the terms of the Franchise Agreement. A common misconception surrounding renewals is that franchisees are entitled to them merely because there is a procedure in the Agreement for requesting a renewal. This provision does not in any way guarantee an extension of the initial franchise term and should not be interpreted as such.
Notice requirement & Renewal fee
In almost all franchise agreements, the franchisee is required to notify the franchisor, within a certain timeframe and before the initial term expires, that it wishes to request a renewal of the Franchise Agreement. The renewal is similar to exercising an option for a commercial lease agreement. If the franchisee misses the opportunity to request a renewal, the opportunity will most likely be lost, unless of course the franchisor approaches the franchisee with an offer to renew the Franchise Agreement.
If the franchisee is successful in its request to renew the franchise, it will probably need to negotiate the terms and conditions of the new agreement, preferably with the assistance of a franchise lawyer. During the negotiations, it is possible that the franchisee will have to pay more than the pricing mechanism that is specified in the terms of the Renewal provision of the original Agreement. This is something you may wish to discuss with your franchise lawyer.
Once notice is given, the franchisee may still be required to pay the franchisor a ‘renewal fee’. This is usually detailed in the terms of the Franchise Agreement. The renewal fee is something that franchisees should anticipate well in advance, as it can be quite expensive. The franchisor may then require the franchisee, in order to renew the franchise agreement, to sign the “then current franchise agreement”. The terms may vary from the original agreement, which is why you should speak with your franchise lawyer about reviewing the new Franchise Agreement.
Negotiation
Your franchise lawyer can, if you engage him/her to do so, negotiate on your behalf the terms of the new Franchise Agreement. For example, sometimes the franchisee will ask for special conditions to further clarify the renewal process. These conditions may relate to the conduct of the franchisor, i.e. that the franchisor must act reasonably and in good faith when deciding whether or not to grant a renewal. Some of these issues, such as the good faith requirement, have been addressed in the new Franchising Code of Conduct. It is common for the franchise lawyer negotiating on behalf of the franchisee to request that the terms of the new Franchise Agreement be “substantially the same commercial terms”. Along with this, the franchise lawyer might add that the renewal fee and its calculation method be adjusted in favour of the franchisee.
Conclusion
Negotiation is an extremely important step that should not be overlooked. A franchise lawyer is a valuable asset to have by your side, as this can significantly change the terms of the new Agreement to which both parties end up agreeing. Even if your Franchise Agreement has a ten-year term, it is worth understanding these issues now, as they will inevitably arise at the end of your initial term. To speak with a franchise lawyer about how to achieve a renewal or negotiate the terms of a renewal, contact LegalVision on 1300 544 755.