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Aspects of A Franchise Agreement – Breaches and Termination

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Part two of our Aspects of a Franchise Agreement discussed the obligations of the franchisee. A breach of any of those obligations will be a breach of the agreement. In some situations, the breach may also be grounds for termination of the franchise agreement.

Breach of The Franchise Agreement

In the event that the franchisee is in breach of the franchise agreement, the franchisor will issue a notice of breach of franchise agreement. The agreement will set out what the notice should contain, such as the reference to the clause that the franchisee has breached and the time frame to remedy the breach. If permitted under the franchise agreement, the notice may also refer to a clause in the franchise agreement that allows for the franchisor to recover its legal costs due to the franchisee’s default. All notices must include evidence of the breach (e.g. emails, photos or a statement of arrears). It should also state that failure to comply with the notice may result in the termination of the agreement. The notice must be correctly served on the franchisee and guarantors.

A notice of breach starts the process of terminating the franchise agreement. In most cases, the franchisee will comply with the notice, remedy the breach and the parties will move on.

Termination of The Franchise Agreement

If a franchisee does not comply with the notice of breach, the franchisor will need to assess whether that would be grounds for terminating the franchise agreement. Termination of a franchise agreement is not undertaken lightly as the franchisor is taking away the franchisee’s business. However, the franchisor cannot risk brand damage or other franchisees questioning why the franchisee is being permitted to act without any punishment.

Any ground for termination of franchise agreement must be contained in the agreement. Ideally the franchisor should talk to the franchisee and advise that it has grounds to terminate the agreement, but is willing to negotiate a termination and handover of the business. This is a ‘friendly’ way in the sense that the franchisee agrees that it cannot comply with its obligations under the agreement and the parties can negotiate the terms of the termination. However, the franchisee may not agree to this. Accordingly, the franchisor should issue the notice of termination of franchise agreement, and wait until the end of the working day to take over the premises and change the locks. As a part of this, the franchisor should also talk to the landlord (if it does not hold the lease) and explain the background to the termination.

Termination Due to Its Default

Termination of the agreement does not forgive any debts owed by the franchisee and guarantor and they must still pay any amounts owing to the franchisor up and including the day that the agreement was terminated. Furthermore, any termination of the agreement is without prejudice to the franchisor’s rights in the agreement and at law. Finally, the franchisee will be liable for the franchisors costs in issuing the notice of termination due to its default.

In conclusion, if you are a franchisee who has been issued with a notice of breach of franchise agreement, you should review your rights under the agreement and seek urgent legal advice.

This article was written by Khushbu Sundarji and Stewart Germann.

Aspects of A Franchise Agreement – Franchisor’s Obligations

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The franchise agreement sets out the obligations of the franchisor towards the franchisee during the term of the agreement such as:

Good Faith

Good faith is a reciprocal obligation and just as the franchisee must act in good faith with the franchisor, the franchisor must also act in good faith with the franchisee. All franchise agreements should include an obligation on the franchisor to act in good faith towards the franchisee.

Provide Advice to The Franchisee

The Franchisor must provide marketing and management advice as well as general advice regarding operating the business.

Promote the Brand

The Franchisor conducts national marketing programmes for the brand such as national campaigns. The franchisor must also provide the franchisee with guidance regarding the marketing programme and the obligations of the franchisee in regard to any network wide competitions.

Promoting Great Relations Between Franchisees

The Franchisor must foster good relations between the franchisees and the network and should never favour any franchisee over the other. The network on a whole is much stronger when everyone works together.

Training and Consultation

When the franchisee initially signs the franchise agreement, it will go through the training as required by the franchisor to operate the business. During the term of the agreement and any renewal period, it must also provide additional training and consultation to the franchisee in relation to an aspect of the business. Usually, franchise agreements allow for the franchisor to charge an additional training fee for providing additional training.

In conclusion, the franchisor must be available to assist the franchisee during the term of the franchise agreement. Be wary of franchisors that appoint a franchisee and then leave the franchisee to its own devices. This will impact the brand as the franchisor will not be informed of how the franchisee is operating the business and if it is in accordance with the terms of the franchise agreement.