Franchise agreements generally operate for a set period. Some franchise agreements may include a right to renew or extend at the end of this period, but this is not guaranteed. A franchise agreement may come to an end early for a number of reasons, and there are certain things a franchisor must do.
Whether you (the franchisee) have, or your franchisor has, the right to terminate your agreement, and in which circumstances, will normally be determined by the terms of the contract. However, if a franchisor proposes to terminate an agreement before it expires, they must follow the processes set out in the Code (for example, provide reasonable notice), except where special circumstances apply.
If you are a franchisee you may not be able to sell your franchise to anyone you want.
Your ability to transfer or sell the franchise to another person may be subject to certain conditions set out in your franchise agreement (for example, firstly obtaining the franchisor’s consent). If you seek the franchisor’s consent to a transfer, that consent cannot be unreasonably withheld. A franchisor will be taken to have consented to the transfer if it doesn’t object within a certain period.
A franchisor may revoke its consent to a transfer within 14 days of granting it by advising the franchisee in writing of the decision and setting out the reasons. The franchisor must not unreasonably revoke its consent.
The Code doesn’t give franchisees an automatic right to a further term after the initial term has ended. This will depend on the terms of your individual agreement.
If there is a right to a further term it may be conditional on the franchisee meeting additional requirements such as refurbishing the premises, paying a renewal fee or entering into the franchisor’s then current franchise agreement.
Obligation to notify
At least six months before the end of the franchise term, franchisors have an obligation to notify franchisees of whether they intend to extend the agreement, or grant another franchise agreement. If the term of the agreement is less than six months, the franchisor must notify the franchisee at least one month before the end of the term.
Month-to-month or 'holding over' arrangements
Sometimes, franchisors and franchisees will enter into a month-to-month, or ‘holding over’, arrangement to extend the agreement beyond its initial term. In our view, franchisors must still comply with the obligations set out by the Code before extending the franchise agreement via a month-to-month or holding over arrangement.
The Code also requires franchisors to outline in their disclosure document certain rights prospective franchisees will have at the end of their agreement. For example, it is common for franchisees not to have the right to sell the franchise business after the agreement ends, and this must be stated in the disclosure document.
Providing the disclosure document
The franchisor’s end of term notice must also include a statement to the effect that the franchisee is entitled to a copy of the disclosure document, unless the franchisee has already requested one in the last 12 months. This is not required if the franchisor does not intend to extend the agreement.
The franchisor must provide its disclosure document to franchisees within the timeframes set out in the Code.
Requesting a copy of the disclosure document
Franchisees don’t need to wait to receive an end of term notice before requesting a copy of the disclosure document. Franchisees can request a copy of the latest disclosure document once every 12 months for any reason.
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 associated company) supplies your stock, you may be unable to obtain stock
- you may lose your right to use the brand
- you may have to continue to making payments to suppliers, landlords, employees and banks even if you can no longer operate your franchise.
Franchisees may request an updated disclosure document from franchisors once every 12 months. The disclosure document must have a statement from the franchisor about its solvency.
In addition to updating the disclosure document annually, franchisors must disclose certain materially relevant facts to prospective and/or existing franchisees within a prescribed time. This includes informing prospective franchisees as soon as reasonably practicable, but before they sign the franchise agreement if a statement, declaration or document relating to the franchisor’s financial details has come into existence and is not reflected in the current disclosure document.
Before buying a franchise, you should look at the disclosure document see the date when the franchisor declared it was solvent. It’s important to talk to a lawyer and accountant to clarify what your rights and responsibilities would be if the franchisor did go under.
Since amendments to the Code were introduced on 1 June 2020, different end of term requirements apply to new vehicle dealership agreements.
For new vehicle dealership agreements entered into on or after 1 June 2020, or renewed or extended on or after this date, the franchisor must notify the franchisee in writing whether they intend to extend the agreement or enter into a new agreement, or neither.
If the franchisor gives notice that they do not intend to extend the agreement or enter into a new agreement, the notice must include the reasons why. This may assist the franchisee in assessing whether the franchisor has acted in good faith.
The franchisor’s notice must also include a statement to the effect that the franchisee is entitled to a copy of the disclosure document, unless the franchisee has already requested one in the last 12 months. This is not required if the franchisor does not intend to enter into the new agreement.
The franchisor must give this written notice:
- at least 12 months or later if agreed by the parties if the agreement is 12 months or longer. However a franchisee should think very carefully about reducing the full notice period
- at least 6 months prior to the end of the term if the agreement is less than 12 months
- at least 1 month prior to the end of term if the agreement is for less than 6 months.
Penalties apply for franchisors who fail to comply with the above obligations.
For new vehicle dealership agreements entered into on or after 1 June 2020, or renewed or extended on or after this date, the franchisee must also notify the franchisor in writing within the same time periods (outlined above) whether they intend to renew, enter into a new agreement or neither. The franchisee must also include reasons for their decision if they do not intend to renew or enter into a new agreement.
In the event that either party provide a notice that they do not intend to renew, extend or enter into a new agreement, the franchisor and franchisee must (as soon as practicable):
- agree to a written plan (with milestones) for managing the winding down of the dealership, including how the franchisee’s stock will be managed over the remaining term of the agreement
- work together to reduce the franchisee’s stock over the remaining term of the agreement.
If you have a dispute about a proposed termination of a franchise agreement, you can use the Code's dispute resolution procedure.