In Short
- Under the cooling-off period, you can terminate a franchise agreement within 14 days, but the franchisor may deduct reasonable expenses.
- Termination might be possible if the franchisor breaches the agreement or both parties agree to end it.
- Franchisors have the right to terminate under “special circumstances” such as insolvency or fraud.
Tips for Businesses
Before signing a franchise agreement, carefully review termination options. It’s essential to understand the cooling-off period, negotiate exit clauses, and be aware of the franchisor’s rights under special circumstances. Legal advice can help clarify these details and ensure you’re prepared for all eventualities.
Table of Contents
As a franchisee, once you enter a franchise agreement, you commit to running a franchise for a set term (often five or more years). However, you may find that you wish to terminate your agreement before its end date. For instance, something may go wrong, or the franchise may simply not be successful. This article will discuss five ways you can terminate a franchise agreement.
Terminating During the Standard Cooling-Off Period
In case you change your mind early on after signing a new franchise agreement, the Franchising Code of Conduct (the Code) provides for a cooling-off period. This means you can terminate a franchise agreement within 14 days of entering the franchise agreement.
However, this standard cooling-off period only applies to entirely new franchise agreements. It does not cover franchise agreements where the franchisor is renewing or extending. Per the Code, where you validly exercise your cooling off rights, the franchisor must provide you with a refund within 14 days of all payments you have made connected to the franchise agreement. The franchisor can, however, deduct their “reasonable expenses” but will need to set out how they will calculate “reasonable expenses” to make any form of deduction.
In this scenario, the cooling off period ends on the earlier of:
- 14 days after the day after the new franchisee becomes the franchisee for the franchise agreement; or
- the day the new franchisee takes possession and control of the franchised business.
If you are a new franchisee exercising your cooling off rights in a transfer scenario, you can give written notice to the old franchisee and the franchisor to:
- stop being the franchisee;
- if possible, make the old franchisee the franchisee again; and
- end any transfer agreement between the new and old franchisee.
Termination Clause Within the Franchise Agreement
Outside the standard cooling-off period, many franchise agreements do not allow the franchisee to terminate the agreement early (i.e., before the term’s end). Therefore, you must seek legal advice and review the franchise agreement before signing.
Despite this, some franchise agreements will allow the franchisee to terminate. Therefore, as a potential franchisee, you should consider negotiating an option to discontinue with the franchisor if the original franchise agreement does not include one.
Another negotiation option you may consider is the insertion of an exit clause upon the occurrence of specific events or payment of an exit fee.
Continue reading this article below the formWhat if the Franchisor Breaches the Agreement?
If no option to terminate exists, the franchise agreement will require you to operate the franchise until the expiry of the term. However, terminating may be possible if the franchisor breaches the franchise agreement. You must follow the appropriate dispute resolution procedure prescribed by the franchise agreement or the Franchising Code of Conduct.
You can use the dispute resolution procedure to request a termination of the franchise agreement. However, you can only do this if you have a cause of action against the franchisor to show that they breached the franchise agreement. There is no guarantee that this process can lead to termination, as it will depend on the strength of your case.
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What if Both Parties Mutually Agree to Terminate?
Under the Franchising Code of Conduct, a franchisee has the right to propose termination of their franchise agreement at any time. To do so, they must submit a written proposal to the franchisor, including the reasons for the proposed termination.
Once received by the franchisor, they must provide a substantive written response, either:
- agreeing to terminate; or
- providing their reasons for refusing the termination or its terms.
If refused, the franchisee can write a new proposal for different reasons. However, this clause does not limit the rights or obligations of either party under the law or the franchise agreement.
What Are “Special Circumstances” Termination Rights?
Additionally, the Code provides franchisors with “special circumstances” or “particular grounds” rights to terminate a franchise agreement by notice to a franchisee. In this case, a franchisor can terminate the franchise agreement after giving a franchisee seven days’ notice of their intention to terminate.
Furthermore, there are seven “special circumstances”, which include where the franchisee:
- no longer holds a licence which they must hold to carry on the business;
- becomes bankrupt or insolvent;
- is a company that becomes deregistered by ASIC;
- voluntarily abandons the business or the franchise relationship;
- is convicted of a serious offence;
- operates the business in a way that endangers public health or safety; or
- acts fraudulently in connection with the operation of the business.
Key Takeaways
There is a certain level of risk and commitment to be aware of when entering a franchise agreement. Therefore, it may be helpful to consider your termination options before signing the franchise agreement. However, some ways to terminate your franchise agreement include:
- during the cooling off period;
- via a clause within the agreement;
- after a franchisor breaches the agreement;
- coming to a mutual agreement with the franchisor; or
- by exercising your special circumstance termination rights.
If you need assistance reviewing, negotiating or drafting a franchise agreement, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Yes, the franchisor must refund any payments made within 14 days of termination, minus “reasonable expenses,” which they must outline. This applies in both standard and transfer cooling-off periods.
Many franchise agreements do not allow early termination beyond the cooling-off period. However, you may negotiate with the franchisor to include an exit clause for specific events or conditions or for the payment of an exit fee.
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