franchise agreement automatic renewal

Does a franchise agreement automatically renew?

Sarah Stowe

You’re poised to buy a franchise and sign up for a five-year term with an option to renew and you’ve banked on running the business for 10 years.

However it is crucial to understand that the agreement will not automatically renew unless explicitly stated. While many franchise systems offer a renewal term as part of their package, the renewal is often dependent upon meeting specific conditions.

For example, you may need to refurbish the premises, pay a renewal fee or sign a franchise agreement under different terms.

Key actions for franchise renewal

  1. End of term notice
    • The franchisor is required to inform you if it intends to extend the existing contract or issue another franchise agreement, and must do so at least six months beofre the term is due to end.
    • The end of term notice will explain that you are entitled to a copy of the disclosure document, just as if you were a first-time buyer.
  2. Pay the renewal fee:
    • Not every franchisor charges a renewal fee but it is a common step in the renewal process. Ensure payment of the renewal fee as specified in the franchise agreement; there is no standard amount. For instance, it could be the initial franchise fee plus the franchisor’s legal costs for preparing renewal documents.
    • Review the franchise agreement to establish the total renewal cost.
  3. Ensure compliance:
    • Franchisors will take a dim view of renewing an agreement with a franchisee who is in breach of the franchise agreement at the time of renewal.
  4. Sign the current franchise agreement:
    • Sign the ‘then current’ franchise agreement, which may have different terms, including higher fees and additional obligations.
  5. Upgrade the premises:
    • Repaint, redecorate, or upgrade the business premises if required by the franchise agreement or lease.
  6. Secure lease renewal:
    • Ensure the lease of the business premises is renewed.
    • If the lease is not renewed and no similar premises are available nearby, the franchise business may not be able to continue operating.

Potential franchisees must thoroughly review the disclosure document and the franchise agreement before signing, paying close attention to renewal terms and the requirements they must meet to secure renewal. Seek advice from a franchising lawyer about renewal terms and your options.

The Franchising Code of Conduct governs the franchisee/franchisor relationship and you can read the full Code here.

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