Every franchise agreement has an expiration date. Accordingly, franchisors need to know how to properly handle franchise renewals and accompanying successor agreements. Although a franchisee’s right to renew is usually subject to them meeting certain requirements, there is a legitimate litigation risk from franchisees who are not renewed against their wishes. The good news – your friends here at Drumm Law have crafted the following guide for franchisors to utilize when dealing with renewals and nonrenewal of franchise agreements.

I. Determine if Franchisee Has a Right to Renew Under the Franchise Agreement

The first question you should ask – does the franchise agreement grant the franchisee the right to renew? If so, what are the requirements they must meet in order to renew, and have they complied with them (more on this later)? The next step is to review applicable state law.

II. Review Applicable Law

In some states, a franchisee may have a right to renew or you may be required to offer them an opportunity to renew. Here are some of the jurisdiction with statutes that deal with franchise renewals: AR, CA, CT, DE, HI, IL, IN, IA, MI, MN, MS, MO, NE, NJ, WA, Puerto Rico, and the U.S. Virgin Islands.
Most state renewal statutes do not grant a franchisee an express right to renew. Instead, franchisees will likely take the argument that they have a right to renew because the franchisor did not follow the state’s laws. Here are some common statutory renewal requirements that franchisors should be aware of:
• Common Notice Requirements
• A Franchisor must provide notice to a franchisee of its intent not to renew a franchise agreement.
• Notice periods vary across states.
• Good Cause for Termination Requirements
• Franchisors may be required to show “good” or “just” cause to not renew a franchise agreement.
• Types of “good” or “just” cause vary across states, such as voluntary abandonment, nonpayment by franchisee, and a franchisee’s noncompliance with the franchise agreement. Absent good cause, the franchisor may be forced to offer renewals.
• Payment of Compensation to the Franchisee Requirements
• Franchisors may have obligation to pay compensation to franchisees upon nonrenewal or termination of their franchise agreement.
• Some states even have rules that prohibit a franchisor from not renewing if a franchisee hasn’t had enough time to recoup their investment.
Most renewal statutes require either one of the above requirements or some combination of the three. It is crucial for franchisors to understand the applicable renewal rules of their state, and if not, discuss it with their franchise attorney. The rules generally require franchisors to follow them to a “T” or be prepared to lose the option to not renew.

III. Common Law

While the list of states above appears long, the majority of states actually do not have statutes that regulate franchise renewals. However, case law may still exist in those states and be problematic for franchisors. Certain common law doctrines may be available to franchisees such as the duty of good faith and fair dealing. Overall, franchisees who use these common law doctrines, in the absence of a state renewal statute, usually have a difficult time succeeding in the courtroom (absent certain circumstances such as unfair dealing). Despite this, franchisors should still be prepared for any common law claims franchisees may make.
Generally, franchisors should be prepared to disclose franchisees who sign new contracts as part of any renewal.

IV. Franchise Agreement Renewal Provision Drafting Tips

With the above information in mind, we have compiled the following tips to consider when drafting the renewal provision within a franchise agreement.
• Generally, renewals are considered a new franchise agreement, and franchisors should be prepared to follow standard registration and disclosure requirements as part of any renewal.
• Except for a few specific circumstances, provisions in the franchise agreement cannot override a state renewal statute.
• Ensure that the franchisee’s right to renewal, if any, is conditioned on the franchisee’s acceptance and agreement to the terms of the new, successor agreement. This is particularly important because franchise agreements tend to change over time as the system grows and laws are updated.
• Include a provision in the franchise agreement which grants the franchisor rights on how to handle any hold-over or interim term in the event the franchise agreement expires without either termination or renewal.

V. Additional Tips

• Both franchisees and franchisors should be sure to calendar renewal dates. Often the franchise agreement requires one or both sides to send advance written notice:
•E.g. for franchisees – indicating that the party intends to renew
• E.g. for franchisors – the reasons why a franchisee is not qualified to renew and/or how it can right the ship and become qualified to renew.
• Many states’ franchise laws treat a franchisor’s refusal/failure to renew similar to a termination. This means not following the rules can lead to lawsuits or damage claims.
• Franchisees should be ready to send all notices and follow all rules required under the agreement to renew. This can mean upgrading equipment, signing a new lease, sending written notice, signing a new agreement, paying fees, etc.

VI. Conclusion

The renewal or nonrenewal process is ripe with legal pitfalls for franchisors in noncompliance with applicable law. Franchisees should also understand their rights and not just assume that a franchisor can refuse to renew them. This “legal minefield” can be difficult to travel without an understanding of how and which state laws and contract requirements interplay. If you have any questions, please contact us. We’d be happy to help!