Once parties enter into a franchise agreement, the franchisee commits to running a franchise for a set term (typically five or more years). For franchisees, this time may be daunting. Some questions a potential franchisee should ask themselves before binding themselves to the franchise agreement include:
- Can I run the franchise for the length of the term?
- What happens if something goes wrong or the business just doesn’t end up being successful?
These are potential risks that are common in any business endeavour, and this article will run through how a franchisee can terminate a franchise agreement.
1. Standard Cooling-Off Period
In case you change your mind early on, the Franchising Code of Conduct does provide for a cooling-off period. You can terminate a franchise agreement within seven days of the earlier of either:
- Entering the franchise agreement; or
- Making a payment under the franchise agreement.
This standard cooling-off period only applies to entirely new franchise agreements and not for franchises that the franchisor is renewing or transferring. The Franchising Code of Conduct will require the franchisor to provide you with a refund minus the “reasonable expenses”. The franchisor will need to set out how they will calculate “reasonable expenses” for them to make any form of deduction.
2. Franchise Agreement
Apart from the standard cooling-off period enforceable for all franchises, many franchise agreements do not allow the franchisee to terminate the franchise agreement early (i.e. before the end of the term). It’s then important your receive legal advice and review the franchise agreement before signing.
Although uncommon, some franchise agreements do provide the franchisee with an option to terminate. A potential franchisee should consider negotiating an option to terminate with the franchisor if the original franchise agreement doesn’t include one.
Another negotiation option you may take into account is the insertion of an exit clause upon the occurrence of specific events. For example, if an event like a relocation of premises occurs, or your finances do not get approved, it will give you the right to terminate a franchise agreement.
3. Franchisor Breach
If no option to terminate exists, the franchise agreement will require you to operate the franchise until the expiry of the term. However, it may be possible to terminate if the franchisor has breached the franchise agreement. It is likely that you will have to follow the appropriate dispute resolution procedure prescribed either 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 are in breach of the franchise agreement. It is not a guarantee that this process can lead to termination as it will depend on the strength of your case.
4. Mutual Agreement
Although not always publicised by the franchisor, if you and the franchisor negotiate to terminate the franchise agreement on mutual terms, then you can terminate the agreement. For potential franchisees, this is an area where you can undertake further due diligence. For example, you can contact former franchisees who have terminated the franchise agreement and query them as to the circumstances surrounding the termination.
A certain level of risk and commitment comes with entering a franchise agreement. You should consider your termination options when deciding whether you should purchase. If you need assistance reviewing, negotiating or drafting a franchise agreement, get in touch with our franchise lawyers on 1300 544 755.
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