They say all good things must come to an end. Unfortunately that plays true to many franchise relationships as well (though if it’s ending, it may not have been all that good to begin with). Franchise agreements can end either by some form of termination, or expiring by their own terms. When most franchise agreements expire, the franchisee will generally have an opportunity to renew the franchise agreement. When considering whether or not to terminate or not renew (which is similar to a terminating) a franchise agreement, there are several important things franchisors and franchisees should keep in mind.

First and foremost, franchisees and franchisors should each keep detailed records. Far too often, one party will want to suddenly refuse to renew or terminate an agreement but didn’t take the steps to set themselves up for success. These include documenting all defaults and putting the other side on notice.

Termination

Typically, neither the franchisor nor the franchisee has the right to terminate the franchise agreement unless the other party has breached the agreement.  A franchisee is usually not allowed to terminate the franchise agreement unless the franchisor committed a material breach (which usually means they did not fulfill one or more of their obligations to the franchisee), and they did not cure the breach after receiving notice from the franchisee.  Franchisors, however, have the option to terminate the agreement in the instance of any default by the franchisee.  Some of these defaults will require the franchisor to give the franchisee a chance to fix the problem, while some allow for immediate termination. The terminating party will almost always need to provide written notice to the party being terminated.

In deciding whether to terminate a franchise agreement, franchisors should understand all applicable laws related to termination.  Many states have franchise protection laws which require franchisors to have “good cause” for terminating a franchise agreement.  In addition, virtually all states have good faith and fair dealing laws that franchisees can use in their defense to a termination.  While many franchise agreement defaults will usually qualify as good cause (such as non-payment of royalties for an extended period of time), there may be some defaults that are so minimal, unreasonable, or unnecessary that a state will not view their violation as reason to terminate the franchise agreement.  Many defaults are also inherently subjective, and can introduce ambiguity into the question of whether a default has even occurred.  Additionally, some states may require franchisors to provide additional or minimum cure periods to franchisees in cases of termination.  Violating any of the notice, good cause or cure requirements may entitle franchisees to receive monetary damages or reinstatement of the franchise agreement.

Franchisees should be aware of the implications of being terminated by a franchisor. Many franchise agreements will require franchisees to pay franchisors for “future lost profits” (usually labelled as liquidated damages). This means that in addition to losing the right to operate the franchise, the franchisee may also be on the hook for whatever fees and royalties they likely would have paid to the franchisor for the remaining term of the agreement.  This is similar to when a tenant’s lease is terminated but they still owe rent for the remaining years of the lease term. Additionally, franchisors may also continue to enforce the non-compete provisions of the franchise agreement, preventing the terminated franchisee from opening a similar business for a period of time post-termination.

If you are a franchisor considering terminating your franchise agreement, or a franchisee who is worried that they may be facing termination, it may be time to speak with a franchise attorney about your rights.

Non-Renewal

There are many reasons why a franchisor or franchisee may not want to renew a franchise agreement. Thankfully for the franchisee, there is nothing to stop them from closing up and walking away when the agreement expires, though they would still be bound by any provisions that survive the expiration (confidentiality, return of items, etc.).  Franchisees should understand their obligations that survive termination.  Often, walking away from a franchise agreement means the loss of their business. So, they might be better served trying to sell the business to a qualified buyer.

Franchisors, are much more limited in their ability to pick and choose which franchisees they want to renew. As with termination, many states require that franchisors have good cause to not renew a franchisee. However, this does not mean they have no control at all over whether a franchise agreement can be renewed. Virtually all franchise agreements require the franchisee to be in compliance with the agreement in order to qualify for renewal.  Most franchise agreements also have specific renewal requirements that must be met (paying renewal fees, signing a new franchise agreement, remodeling or renovating the business, etc.). If a franchisee is unwilling to comply with any of these provisions, that may provide grounds for the franchisor to refuse to renew the agreement. Additionally, the franchisee wishing to renew their franchise would have to sign a new franchise agreement and, unless otherwise locked in the by the old agreement, would be subject to the terms and conditions in the new franchise agreement. Depending on how much the franchise system has evolved over the years, the new franchise agreement may look significantly different than the one the franchisee signed 5 or 10 years ago. If the franchisee is unwilling to agree to the terms of the new franchise agreement, that might also effectively allow the franchisor to deny renewing the franchise.

Franchisors should document any problems or defaults that occur in its relationship with every franchisee.  Much like a termination, sometimes the franchisee’s conduct merits non-renewal and sometimes it does not.  However, if the franchisor can’t show that the alleged defaults occurred and that they provided the franchisee with sufficient notice to fix the problems, it will likely face a tougher road in ending the relationship.

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