Legal advice is considered to be so important that the Franchising Code of Conduct requires a franchisor not just to advise each franchisee to seek independent legal advice but get a statement from each franchisee that they have taken legal advice or, was advised to do so but decided against it.

In this article I address what a franchisee should be looking for in the fine print of a typical franchise agreement. For starters it is important to ask what rights are actually granted under the franchise agreement.

Is the franchise for a specific territory or limited to a particular site? Is the territory exclusive? Even if it is exclusive there may be exclusions; for example the franchisor may reserve the right to conduct business over the internet, to sell products in non branded outlets such as supermarkets, or to alter the territory in certain circumstances such as failure to meet minimum performance requirements. Any exclusions should be carefully examined and discussed with the franchisor.

Termination: A typical franchise agreement and the Code provide various methods by which a franchisor can terminate a franchise agreement. Clause 23(g) of the Code specifies seven grounds upon which it is legitimate for a franchisor to terminate a franchise agreement immediately, for example the franchisee abandoning the franchise or being guilty of fraud.

One of the seven grounds for immediate termination set out in clause 23(g) of the Code is where the franchisee agrees to the termination. This clause is often used by franchisors to go beyond the grounds set out in the Code. The argument is that by signing the franchise agreement detailing the circumstances that will allow the franchisor to immediately terminate the franchise agreement, the franchisee agrees to the termination.

The franchisee’s lawyer should aim to confine the grounds for immediate termination to those set out in clause 23(g) and endeavour to negotiate a clause in the franchise agreement that allows the franchisee to give notice of breach to the franchisor, requiring the breach be remedied within a reasonable time, and if not, for the franchisee to be entitled to terminate the franchise agreement.

Selling up: The costs associated with selling a franchise business can be substantial. The franchisee may be required to pay the franchisor’s costs associated with investigating the purchaser franchisee and approving that franchisee, the franchisor’s legal costs for terminating the franchise agreement and entering into a new agreement with the purchaser franchisee, the cost of training the new franchisee and often a transfer fee.

It is important that franchisees are aware of the possible costs associated with selling their franchise business so that these costs can be factored into negotiations with any purchaser franchisee.

Not many franchise agreements deal with this issue, but franchisees should be requesting clauses to better protect them if the franchisor becomes insolvent: the head lease (where relevant) be held by the franchisee, the franchisee to be entitled to terminate the franchise agreement if the franchisor becomes insolvent, the restraint clauses be waived in the event of franchisor insolvency, the franchisee be permitted to debadge the premises and continue trading.

Conflict: Another important consideration is where there is a conflict between the franchisee and franchisor, how and where is that dispute to be resolved?

The governing law of and jurisdiction set out in the franchise agreement may be the law of another state or territory in Australia or in the case of a foreign franchisor, the law of another country. This may mean that a franchisee is required to travel interstate or overseas to initiate or defend proceedings or attend mediation. Where possible the governing law should be the law of the state or territory in which the franchisee’s business operates.

The above is by no means an exhaustive list of the key provisions and considerations that should be considered before embarking upon buying a franchise. Seeking a lawyer who is experienced in franchising will assist in wading through the fine print and ensure that the advice obtained is practical and cost effective.

This article was written by Raynia Theodore and Louise Wolf of the corporate & franchising team at Mason Sier Turnbull. Email raynia.theodore@mst.com.au or louise.wolf@mst.com.au