Whether the franchisee or the franchisor have the right to terminate a franchise agreement, will normally be determined by the terms of the franchise agreement. Generally, franchise agreements do not provide a franchisee with an ability to terminate the franchise agreement. One exception to that rule is that if you change your mind shortly after entering into the agreement, the Franchising Code of Conduct (Code) provides for a seven day cooling-off period and this will be set out in the franchise agreement. However, once the cooling-off period expires, the options available to a franchisee to exit the franchise are limited. Set out below are 4 ways for a franchisee to exit a franchise:
Surrendering your franchise back to the franchisor – this is the easiest and fastest way to exit your franchise agreement. The franchisor is under no obligation to agree to a surrender. However, the franchisor may have a potential franchisee who can take over the site, or alternatively the franchisor may want to take over the business themselves to preserve the brand and ensure there is no adverse publicity where a franchisee may be struggling to operate the franchise business. An exiting franchisee may be liable to an exit fee as compensation for the franchisor for future lost franchise fees/royalties. If the franchisor agrees to such a surrender, then the franchisor will require the franchisee to sign a surrender deed with mutual releases. As a franchisee you should also ensure the release of any personal guarantees. It is recommend that you obtain legal advice to ensure that your rights are properly protected.
Transferring/selling to a third party with the franchisor’s consent – a franchisee my sell or transfer the franchise business, subject to the franchisor’s consent. Division 4, Part 24 of the Franchising Code of Conduct (Code) permits the franchisee to request a transfer (sale) of the franchise business. In addition, there will be specific clauses in the franchise agreement that reflects what the Code says about transfers. Often the franchise agreement will grant the franchisor a first right of refusal where the franchise business must first be offered to the franchisor prior to the franchisee being able to sell/transfer the franchise business. It is timely to note that there are a list of reasons in Division 4, Part 25 of the Code that explain when a franchisor may reasonably withhold consent. Provided that the franchisor grants consent for the sale/transfer, the franchisee my then sell/transfer the franchise business. It is recommended that the franchisee engage an experienced franchise lawyer early in the process to negotiate and secure the best possible commercial terms with the proposed purchaser and prepare the sale of business agreement and address any of the franchisor requirements, such as the need for the franchisee to sign a termination deed.
Establishing a franchisor breach of the franchise agreement – in most cases, a breach by a franchisor may be difficult to prove for most franchisees. The franchisee can rely on the terms of the franchise agreement in circumstances where the franchisor is in breach of an essential term of the franchise agreement, or where the franchisor is in breach of the Australian Consumer Laws, for example, misrepresenting the profitability of the franchise business to the franchisee prior to the franchisee entering into the franchise agreement. Under the Code, there are prescribed dispute resolution procedures and these are mirrored in the franchise agreement. Your ability to terminate the franchise agreement will depend on the seriousness of the franchisor’s breach and whether they have done anything to remedy the breach. Once the franchisee has terminated the franchise agreement for a franchisor’s breach, the franchisee may commence court proceedings against the franchisor and seek damages caused by the breach. It is highly recommended that the franchisee obtain legal advice prior to taking any steps to terminate the franchise agreement for franchisor breach.
Abandonment – a franchisee may as a last resort close the doors of their franchise business and walk out; however by taking such a step, the franchisee may be liable to the following actions by the franchisor, namely:
1. The franchisor immediately terminating the franchise agreement, in accordance to the Code;
2. The franchisor may pursue the franchisee for the fees it would otherwise receive during the remainder of the term of the franchise agreement;
3. If the franchisee is holding a lease, the landlord may pursue the franchisee for breaking the lease and for rent and outgoings until the end of the term of the lease, and may also pursue personally the guarantor if a personally guarantee has been given to the landlord; or
4. If the franchisor is the tenant under the lease, franchisee being pursued by the franchisor under the licence or sub-lease that the franchisee holds with the franchisor for unpaid rent and outgoings until a new franchisee is secured.
Contact Rostom Manookian on 0416 716 960 or email rostom@manookiansolicitors.com to discuss how we are able to assist you with all legal requirements. We offer fixed fee services to ensure transparency and certainty to meet your requirements. We provide legal services in franchising, business, property, conveyancing, leasing, intellectual property, and other commercial related contractual and transactional matters.
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