“Jamie” runs a video store franchise. He has been in ongoing dispute with the franchisor over various issues, including delays in reporting, and complaints from customers. He doesn’t respect the franchisor and if he is honest with himself he wants out of the system. He has been slow to respond to repeated requests for information from the franchisor. The franchisor has issued him with a breach notice in relation to the delays in reporting. In short, this hasn’t been the best relationship.
This dispute comes at a bad time for Jamie. The franchise agreement is nearly five years old and it is coming up for renewal. Jamie just misses the deadline to notify the franchisor of his desire to renew the franchise agreement. In addition, Jamie finds (to his surprise) that there is a substantial fee required to be paid on renewal.
Jamie suddenly wants the franchisor to waive the notice period requirement for renewal and allow him to renew at a discount to the renewal fee in the agreement. Two days before the expiry of the franchise agreement he consults a franchise lawyer. The lawyer also finds out that Jamie has a licence to occupy from the franchisor (not a lease from the landlord) and if the franchise is not renewed Jamie loses the site and can be removed by the franchisor.
What should Jamie do now? What should he have done to avoid this dire situation?
It may come as a surprise to many franchisees that their right to operate their franchise can come to an abrupt end. Unless the right steps are taken to ensure renewal of your franchise agreement, you may find that the hard work you have put in to building the business is put at jeopardy because you have not taken seriously the procedures relating to the renewal of your franchise agreement.
Almost all franchise agreements have an initial term (such as an initial term of 5 years) and a process embedded in the agreement for a renewal of the agreement for at least one additional term. Some franchisees may assume that merely because there is a procedure for requesting a renewal under the franchise agreement, that there is a right or guarantee of an additional franchise term on exactly the same terms and conditions as they signed at the start of their first term.
This assumption is wrong.
The first point to note is that in nearly all franchise agreements, the franchisee must give written notice within a specific window of time prior to the initial term ending of its desire to renew the franchise agreement (similar to the exercise of an option under a lease agreement). If the franchisee misses this window, the right to renew is lost.
The franchisee will then have to negotiate a new franchise agreement and possibly pay more than the pricing mechanism stipulated under the original franchise agreement for renewal – or worse have the franchise handed back and the right sold to another party.
Even if proper written notice is given, the franchisee will often have to pay a renewal fee. This renewal fee should be budgeted for well prior to the renewal. It is also often the case that the franchisee will be required to sign the “then current franchise agreement” – which may be a substantially different from the original franchise agreement.
Some more astute franchisees may request that a special condition be inserted into the franchise agreement clarifying further the process of renewals, stipulating that the franchisor must act reasonably and in good faith in exercising its discretion whether to renew and requiring the franchisor to issue a franchise agreement in “substantially the same terms” as the original franchise agreement upon renewal. They may also request a reduction in the renewal fee or a change in the way the renewal fee is calculated.
Most franchise systems will not be willing to change their standard form agreement, but it is definitely worth asking whether they would be prepared to make these changes, as the franchise renewal fee can be surprisingly high and be a real burden on the business when it comes time to renew.
Do not ignore these issues when you are reviewing the franchise agreement – and seek appropriate legal advice on these issues when you are negotiating your entry into the franchise system.
You should not underestimate the importance of negotiating these matters at the time the franchise agreement is being finalized. Five years into the future can seem a lifetime away and issues relating to termination and renewal may seem trivial at the time, but the end of the initial term can sneak up on franchisees very quickly and the whole renewal process can be unnecessarily stressful if the appropriate steps have not been planned well prior to the renewal date.