How to Get Out of a Franchise Agreement

A Franchise Agreement is a binding agreement for a particular term. The term of most Franchise Agreements is somewhere between three to 10 years, with the average being around a five-year term.

As with any other binding contract, a Franchise Agreement will bind the Franchisee for the whole of the term. Below are some methods a franchisee may employ to end a franchise agreement early:

1.        COOLING-OFF PERIOD

After a Franchisee enters into a Franchise Agreement, they will have 14 days within which to terminate. This 14-day period is referred to as the “cooling-off” period.

If a Franchisee terminates during the cooling-off period, then the Franchisor may be able to retain some of the monies that were paid by the Franchisee, provided that the actual amount or the method of calculation was provided to the Franchisee prior to entering into the Franchise Agreement. The Franchisee will still be bound by the restraint of trade and confidentiality provisions contained in the Franchise Agreement together with other terms, if applicable.

2.        SALE OF BUSINESS

The Franchisee may be able to sell its business. This may assist the Franchisee to recognise some of the goodwill that it may have created in the operation of its Franchised Business. The Franchisee may be required to pay a transfer fee to the Franchisor if it sells the business.

If the Franchisee has a long-term lease that attaches to the operation of the Franchised Business, then this can be a very valuable tool to bring to an end the liability of the Franchisee under, not only the Franchise Agreement, but also the lease.

3.        SALE BACK TO FRANCHISOR

In some circumstances, the Franchisor may be willing to purchase back the Franchised Business through negotiation.

4.        BREACH OF FRANCHISE AGREEMENT BY FRANCHISOR

If the Franchisor is in breach of the material term of the Franchise Agreement, and fails to remedy that breach within a reasonable time after receiving a notice to do so, then the Franchisee may be able to terminate the Franchise Agreement.

This termination would fall within contract law and the Franchisee may be able to sue the Franchisor for the loss it has suffered as a result of the termination of the Franchise Agreement.

Legal advice must be sought before a Franchisee goes down this track.

5.        DISPUTE

Disputes can arise between the parties about various matters.

The dispute procedure can be of great assistance to Franchisees in leveraging an agreement to be released from the Franchise Agreement in circumstances where the Franchisor has breached the Franchise Agreement, Franchising Code of Conduct, other applicable legislation and/or contract law.

The Franchisee may have a cause of action against the Franchisor or may be able to report the breaches of the Franchisor to the ACCC. The Franchisee may agree not to pursue these courses of action in circumstances where the Franchisor releases the Franchisee from any further obligations under the Franchise Agreement.

Again, Franchisees should seek legal advice prior to embarking upon this course of action.

6.        TERMINATION BY FRANCHISOR

Franchisees are often surprised that they may still be liable under the terms of the Franchise Agreement in circumstances where the Franchisor has terminated the Franchise Agreement as a result of a breach by the Franchisee.

Just like any other contract, if the Franchisee is in breach and fails to remedy that breach, then the Franchisor may elect to terminate the Franchise Agreement and sue the Franchisee for the loss it has suffered as a result of that termination. The loss could include, for example, the loss of fees that the Franchisee would have paid until the end of the term, the cost of finding a new Franchisee, legal costs and other costs incurred.

If a Franchisee wishes to get out of its Franchise Agreement, then the Franchisee should seek legal advice before embarking upon any action.

We can provide you with advice in these matters.

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