Franchise agreement terminations – what you need to know

Sarah Stowe

The termination of a franchise agreement is an issue that most franchisees hope they will never have to face. However, this is a reality which many franchisees encounter at some point during their tenure.

In this article, I explore some of the common grounds for termination of franchise agreements, the termination process and the protections for franchisees under the Franchising Code of Conduct.

Common grounds for termination
The most common grounds for termination of a franchise agreement involve the franchisee failing to pay moneys due under the franchise agreement, for example fees/royalties to the franchisor or rental payments to the landlord. These liabilities are amongst the major overheads for the franchise business, and it can be easy for franchisees to fall into arrears when money is tight.

Unfortunately for franchisees, these are also the easiest grounds on which their franchise agreement may be terminated. This is because it is easy to prove both the existence of the obligation under the franchise agreement and the failure to pay.

The breach and termination process
Unless the franchisor has the right to immediately terminate the franchise agreement (as discussed below), the franchisor must comply with several requirements in the franchise agreement itself and under the Code. Prior to terminating the franchise agreement the franchisor must send a breach notice to the franchisee which sets out the following: the clauses of the franchise agreement which the franchisee has breached; the particulars of the alleged breaches; what the franchisee needs to do in order to remedy the breaches; the timeframe in which the franchisee must remedy the breaches (this must be a reasonable time, but does not need to exceed 30 days); and that the franchise agreement will be terminated if the franchisee fails to remedy the breaches within the specified timeframe.

If the breach notice complies with all of the above elements, then the franchisee must ensure that action is taken to remedy the breaches in the manner and in the timeframe specified in the breach notice. Failure to do so will hand the franchisor a right to immediately terminate the franchise agreement.

However, if the breach notice does not comply with the requirements under the Code, a franchisee may be able to argue that the breach notice was defective and have it set aside. Arguments often arise surrounding whether the timeframe to remedy the breaches is reasonable. Where the franchisor proceeds to terminate the franchise agreement on the basis of a defective breach notice, the courts may overturn the termination.

Immediate termination
There are certain grounds on which a franchisor may immediately terminate a franchise agreement, such as if the franchisee voluntarily abandons the franchised business, becomes bankrupt, operates the franchised business in a way that endangers public health and safety or is fraudulent in connection with the franchised business.

Consequences of termination
The consequences of termination will depend largely on the specific franchise agreement and the attitude of the franchisor. However, it is important to understand that the rights of the franchisor are not extinguished upon termination of the franchise agreement. On the contrary, the franchisor will often have right to sue the terminated franchisee for outstanding money and damages for losses arising out of the termination.

Where the franchisee holds the premises lease, those obligations may remain even though the franchisee no longer has the right to operate the business. Whether or not the franchisee holds the lease personally, upon leaving they may be responsible for performing ‘make good works’ to restore the premises to a condition suitable for leasing.

Many franchise agreements impose restraints of trade, which restrict the franchisee from conducting a similar business within a certain geographical area for a certain timeframe.

The above are just some of the many potential consequences of termination, so it is important to understand that termination does not allow a franchisee to walk away without repercussions.

Raynia Theodore is principal, corporate advisory and franchising team at Mason Sier Turnbull Lawyers.