In a perfect world a franchisor would never have to face this issue, but it happens. Franchisees do stop trading and simply walk way. It happens for many reasons including personal or financial issues that affect the franchisees, sometimes the business simply fails. Sometimes a franchisee may be frustratetd that they are not receiving enough support or believe that their franchisor has breached the franchise agreement and decide to end the relationship.

If you hold the head lease get in touch with your landlord, quickly!

Don’t wait until you are served with breach notices from the landlord. Talk to them about what is happening and be prepared to cover the rent, outgoings and arrears owing if you want to keep the site and avoid the landlord terminating the lease. Obviously all of these circumstances depend on the conditions in your lease but the point is to deal with the matter quickly. In many cases a bank guarantee or security deposit may be relied upon to meet those arrears.

Recently, the Courts have considered the relevant principles and factors that apply in determining whether a franchisee has voluntarily abandoned a franchise agreement. Pursuant to clause 23(c) of the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Current Franchising Code), a franchisor does not have to follow the breach provisions in clause 21 and may (if its franchise agreement provides) immediately terminate a franchise agreement if the franchisee voluntarily abandons the franchised business or the franchise relationship. Determining whether a franchisee’s conduct amounts to a ‘voluntary abandonment’ will turn on the facts of each case. For example, in Alpha Centauri Enterprises Pty Ltd v Mortgage House of Australia Pty Ltd [2009] NSWSC 333 it was held that the elements of ‘voluntariness’ and ‘abandonment’ were satisfied because the franchisee was not compelled either to terminate the agreement and voluntarily moved out of the premises from which the franchise operated.

In essence, it is imperative that the franchisee leaves the business or franchise relationship and does so in and of its own free will.

Moreover, the Courts are not concerned with whether or not a franchisee actually had the intention of abandoning the franchise agreement. Rather, the Courts will examine whether the franchisee’s words or conduct, objectively viewed, manifests the intention to abandon the franchise agreement in determining whether abandonment (i.e. implied repudiation) has been established. Consider specific conduct- has the franchisee removed plant and equipment? Has the franchisee notified third parties that it has ceased trading? Has the franchisee told you that it is going to stop trading?

Contact the franchisee

Make sure you know why they have closed. Do not assume that the franchisee has abandoned the franchise immediately. They may have been forced to temporarily close because of illness or family emergency. Commercially, you should consider whether the relationship can be salvaged or a negotiated compromise reached? You may want to consider a mutual surrender of the franchise. This document commonly in the form of a Deed can set out the conditions on which the franchisor is willing to accept surrender, for example for repayment of debt. This approach can, in some circumstances, avoid further costs which can ensue as a result of issuing breach and termination notices.

Termination

If you believe the franchisee has truly abandoned the franchise then you may choose to terminate the franchise immediately in accordance with section 23(c) of the Current Franchise Code (see note below). We suggest you seek legal advice to ensure that you have appropriate grounds to do so.

Confirm in writing

After termination, franchisors should write to the franchisee and confirm any applicable restraint provisions within the Franchise Agreement.

Recovery

Consider your recovery options. What security do you have over the franchisee’s business or assets? Do you have a guarantee in place? Do you have a right to acquire assets or exercise a right of first refusal? If so, watch the time limits so you don’t miss them. If you don’t have a crisis management plan to deal with abandonment then, it may be an opportune time to consider your risk strategy and put some simple measures in place going forward.

New Code

It is important to note that the new Franchise Code comes into effect on 1 January 2015 and applies to conduct occurring after that date. There are many relevant changes that will apply to a franchisor including changes to termination rights for Franchisors. You should seek legal advice as to how the new Franchise Code will impact your franchise system, transactions and documents.