This is the third blog in our ongoing new series of short articles about the “basics” of franchising. In this series, we briefly offer practical information addressing some of the fundamental issues concerning franchising. This series is intended to answer and de-mystify some common questions frequently posed to us by prospective franchisees and franchisors.
Franchise agreements are contracts between the franchisee and franchisor. These agreements usually leave little room for negotiation and are drafted in favour of the franchisors. While each contract will differ, franchise agreements almost always include legal language giving a franchisor the right to end the contractual relationship with the franchisee. Typically, there are two sets of circumstances under which the franchisor can “terminate” the relationship: (i) the franchisor can end the relationship before the initial term of the franchise agreement expires, if certain events set out in the contract take place; and (ii) the franchisor can deny the franchisee a right of renewal if the franchisee fails to meet the contractual pre-conditions for renewal.
Termination clauses usually contain a broad list of events or behaviours the occurrence of which gives the franchisor the right to terminate the franchise agreement.
Some events may be curable, meaning that the franchisor will give a franchisee written notice of the default and the opportunity to fix the problem within a limited period of time. Termination clauses outline how to cure a default and the amount of notice to be given by the franchisor. Other, more serious, events may be non-curable, meaning that the contract is terminated as soon as a defaulting event occurs. Some common events of default include but are not limited to:
- Failing to maintain the franchised premises to the standards contained within the agreement.
- A franchisee becoming insolvent or bankrupt.
- Failing to pay royalty fees or other payments owed.
- Abandoning the franchised premises.
- Failing to meet minimum performance requirements.
Franchise agreements include an initial term and usually one or two renewal periods; however, renewal is not guaranteed as it is often conditional on meeting the franchisor’s requirements. Those requirements can include renovating the premises, paying a renewal fee, re-attending training or meeting minimum performance requirements. If a franchisee does not meet the requirements outlined in the franchise agreement, the franchisee may be denied the opportunity to exercise its renewal right and the agreement will expire when the initial term ends.
Both termination and renewal clauses will also impose obligations on the franchisee (and usually the franchisee’s owners) after the business relationship has ended. A terminated franchisee (and its owners) will typically be bound by covenants not to compete, to stop using the franchisor’s proprietary marks, and not to use the franchisor’s trade secrets.
Most franchise agreements will permit a franchisor to “fire” a franchisee under certain circumstances, or not to renew the franchise agreement when the initial term expires. This contractual language can be difficult to understand, and it is recommended to consult with a franchise lawyer to better understand the scope of the franchisor’s right to “fire” the franchise owner or not renew the franchise agreement.