Posted by Elizabeth Gore-Jones
on 21 May 2015
The scenario:
1. a buyer is buying an existing franchised business from an existing franchisee;
2. the franchisor requires ther buyer to enter into a new franchise agreement rather than a transfer or assignment of the existing franchisee's franchise agreement.
The question:
Is the buyer entitled to a seven day cooling off period?
The Law:
The Franchising Code of Conduct is clear that a franchisee has a 7 day cooling off period from the earlier of entering into the franchise agreement or making a payment under the franchise agreement.
However, the cooling off period does not extend to a transfer, renewal or an extension of the term or scope of an exisiting franchise agreement.
Application:
Most franchisors will require the buyer to enter into a new franchise agreement. This gives the franchisor the opportunity to ensure the buyer is covered by the most recent version of the franchise agreement.
This is arguably not a transfer but is a new franchise agreement and the buyer should be afforded the right to terminate during the cooling off period.
If the franchise agreement is signed at least 7 days prior to the settlement of the contract, the buyer may take advantage of the cooling off period before settlement of the contract of sale if the buyer chooses. However, to ensure the buyer is not then bound to still settle the contract of sale, the contract may need to contain a special condition allowing the buyer to terminate the contract of sale if it exercises its rights under the cooling off period. if it does not contain that special condition then the buyer may still be required to purchase the business even if it does not have the right to operate the business.
If the seven day cooling off period lapses after the contract of sale settles, then the buyer would generally not be advised to exercise its rights under the cooling off period as it may be stuck with a business it can't operate because it terminated the franchise agreement.
Conclusion:
Buyers should ensure that the contract of sale contains a provision to ensure it can terminate the contract of sale should it exercise its rights under the cooling off period.
Franchisors should be aware that they may be required to honour cooling off periods in these scenarios and need to ensure the contracts of sale provide sufficient protection for them and their interests.
Disclaimer - This information is of a general nature only and should not be relied upon as legal advice. You should seek legal advice about your specific situation. Please contact The Franchise & Business Lawyers if you would like advice about your circumstances.
