Franchise agreements don't always last their full term - they can get cut short for a number of reasons.
If a franchisee has the right under their franchise agreement to transfer their franchise to another person, the franchisee must make written a request for the franchisor's consent to transfer. A franchisor cannot unreasonably withhold consent. A franchisor may revoke its consent to a transfer within 14 days of granting it. A franchisor will be taken to have consented to the transfer if it doesn’t object within 42 days of the request.
Franchisor insolvency can affect franchisees in different ways. For example:
- if the franchisor holds the head lease on your premises, you may lose your right to occupy the premises
- if the franchisor (or an associated company) supplies your stock, you may be unable to obtain stock
- you may lose your right to use the brand
- the franchisor may no longer be able to provide marketing and training support
- you may be required to continue to pay royalties and other fees even when the franchisor goes into administration (as long as the administrator continues to meet the franchisor's obligations)
- you may have to continue making payments to suppliers, landlords, employees and banks even if you can no longer operate your franchise.
Before buying a franchise, you should look at the franchise agreement to see if it says anything about franchisor insolvency. Also talk to a lawyer to clarify what your rights and responsibilities would be if the franchisor did go under.
Franchisees can terminate their franchise agreements
- within seven days of entering into the agreement or paying any non-refundable money (the cooling-off period)
- where their franchise agreement allows them to terminate.
Whether a franchisor has the right to terminate a franchise agreement, and in which circumstances will normally be determined by the terms of the agreement. However, franchisors must follow certain processes, as set out in the Code, except where special circumstances apply.
Breach by franchisee - if a franchisor intends to terminate a franchisee’s agreement for breaching the agreement, the franchisor must:
- give the franchisee reasonable written notice that it proposes to terminate the agreement because of the breach
- tell the franchisee what it needs to do to remedy the breach
- allow the franchisee a reasonable time (up to 30 days) to remedy the breach.
If the breach is remedied within the prescribed timeframe, the franchisor cannot terminate the franchise agreement because of that breach.
No breach by the franchisee - a franchisor may have a right under the terms of the franchise agreement to terminate the agreement before it expires, even though the franchisee has not breached the agreement or consented to the termination.
A franchisor intending to terminate an agreement on this basis must give the franchisee reasonable notice of the proposed termination and the reasons for it.
Special circumstances - a franchisor does not have to comply with termination procedures outlined above if it intends to terminate a franchisee's agreement for one of the special circumstances set out in the Code, and the franchise agreement allows it to terminate for that reason.
The special circumstances include where the franchisee:
- no longer holds a necessary licence
- becomes bankrupt
- voluntarily abandons the franchise
- is convicted of a serious offence.
The Franchising Code doesn’t give franchisees an automatic right to renew or extend their franchise agreement or enter into a new agreement after the initial term has ended. Whether you have the right to renew or extend your franchise agreement, or enter into a new agreement, will depend on the terms of your individual agreement.
Before entering into a new agreement, or renewing or extending an agreement, you should ensure you fully understand what will happen at the end of the contract term, and what your rights and responsibilities will be. For example, you should carefully check whether the ongoing fees and other payments will increase for the new term.
If you have a dispute about a proposed termination of a franchise agreement, you can use the Code's dispute resolution procedure.