Ending a franchise agreement

Considering the end of the agreement

Franchisees need to think ahead about what happens when the franchise agreement ends.

Franchisees can find out critical information about what happens at the end of their agreement in the disclosure document and franchise agreement.

The types of information franchisees should look for are:

• the date the franchise agreement ends or the franchise term
• if the franchisor can terminate the agreement early, such as before the end of the franchise term
• if the franchisee can terminate the agreement early
• whether the franchisor allows the franchisee to sell their franchise, and under what conditions
• what the franchisee’s rights are when the franchise agreement ends. This includes the right to renew or extend and any rights to goodwill at the end of the term. It also includes if franchisees can operate or be employed in a similar business to the franchised business in the future, or if there are restraint of trade terms in the agreement.

Ways a franchise agreement can end

A franchisee can change their mind and end the agreement within:

• the cooling-off period
• 14 days after receiving leasing information if they are leasing or occupying premises from the franchisor or their associate.

These are other ways for a franchise agreement to end.

• The agreement is not renewed at the end of the term.
• It may be ended by the franchisor early.
• The franchisee can ask for it be ended.

Terminating during the cooling-off period

For a new franchise agreement

A franchisee may terminate a franchise agreement within 14 days of entering into the agreement (the cooling-off period). If a franchisee terminates the agreement during the cooling-off period, they must do so in writing and can get some or all of their money back.

In some cases a franchisee can choose not to have the cooling-off period (known as opting out of the cooling-off period), by giving written notice to the franchisor.

For a transferred franchise agreement

A new franchisee has a cooling-off period after they enter into an agreement that was transferred to them from the old franchisee.

If an existing agreement has been transferred to a new franchisee, they can terminate by providing written notice by whichever of these happens earlier:

• 14 days after becoming the new franchisee
• the day they take possession and control of the franchised business.

Money the franchisee can get back if they cool off

If a franchisee pays money to the franchisor and then changes their mind about a franchise agreement during the cooling-off period, the franchisor must return the money within 14 days of being notified by the franchisee.

However, the franchisor can keep the franchisee’s money if:

• the money is for reasonable expenses relating to the termination of the agreement, and
• the expenses or their method of calculation is included in the franchise agreement.

When franchisees can opt out of the cooling-off period

A franchisee can only opt out of the cooling-off period when:

• the franchisee has or had a similar agreement recently with the same franchisor that is substantially the same as the franchise agreement, and
• the business that is the subject of the franchise agreement is the same or substantially the same as the business that was the subject of the other agreement.

Ending a franchise agreement after receiving lease information

If a franchisee is leasing or occupying premises from the franchisor or its associate for the franchise business, franchisees can terminate their franchise agreement within 14 days after they:

• receive the proposed lease or terms of occupancy, or
• receive the final lease or terms of occupancy if these are not substantially identical to the proposed lease or occupancy terms, or
• enter into the lease or are granted the occupancy licence if the terms are not identical to what was previously provided.

This is subject to the franchisee not having chosen to opt out of the cooling-off period.

Ending a franchise agreement at the end of the term

A franchise agreement doesn’t have to be renewed or extended when it ends. This will depend on what’s in the agreement.

Franchisors do not have to renew or extend the term of the franchise agreement, unless the agreement says so. Franchisors can often end a franchise agreement even without the franchisee’s consent.

Notifying franchisees of the end of term

Franchisors must tell franchisees in writing whether they'll extend the franchise agreement or grant another agreement. The franchisor does this by giving the franchisee an end of term notice.

The franchisor must do this at least 6 months before the end of the agreement term. If the term of the agreement is for less than 6 months, the franchisor must do this at least one month before the end of the term.

If the franchisor intends to renew or extend the agreement, the franchisor must tell the franchisee in their end of term notice that they are entitled to a copy of the disclosure document. This is unless the franchisee has already requested a disclosure document in the last 12 months.

Ending a franchise agreement early

The ways that an agreement may be ended early, for both the franchisor and franchisee, must be set out in the franchise agreement. It must also be summarised in the disclosure document.

If you’re a new vehicle dealer, there are specific parts of the Franchising Code of Conduct which only apply to new vehicle dealership agreements that are terminated early.

Franchisors terminating an agreement early

In a typical franchise agreement, there are usually many reasons why the franchisor can terminate the agreement early.

Often, a franchisor can terminate the agreement when the franchisee hasn’t broken the agreement and doesn’t want to end the agreement early.

An agreement can also end early because the franchisor becomes financially unsuccessful (goes bust).

Telling the other party

If a franchisor wants to terminate the agreement, they must always follow the processes set out in the franchising code before they can terminate.

If the franchise agreement was entered into before 1 July 2021, the code allows franchisors to terminate an agreement immediately if they meet certain ‘particular grounds’ listed in the code.

If the agreement was entered into, extended or renewed on or after 1 July 2021 the franchisor must give the franchisee 7 days’ written notice of the proposed ‘particular grounds’ early termination.

If the franchisee wants to raise a dispute from the proposed termination, the franchisor must not terminate the agreement for 28 days. This gives the franchisee time to try to resolve the dispute.

Franchisees terminating an agreement early

There is usually very limited ability for a franchisee to end the agreement early.

Terminating the agreement or selling the franchise will depend on whether the franchisor agrees, or whether it’s allowed under the franchise agreement. Even if a franchisee can terminate, it can end up being very expensive for them.

Prospective franchisees should get legal advice before signing the franchise agreement to make sure they understand all the reasons why the franchisor can terminate the agreement.

Telling the other party

If a franchisee wants to terminate their agreement early, the franchising code sets out a procedure they can follow to propose this to the franchisor. This doesn't give the franchisee an automatic right to terminate. It is just a way for the franchisee to formally ask the franchisor if they will agree to terminate the agreement.

The franchisee must provide a written proposal to terminate their agreement, and specify the reasons for wanting to terminate.

The franchisor must then provide the franchisee a substantive written response to the proposal within 28 days, including (if relevant) reasons for the refusing the proposal.

Compensation for early termination

Determining compensation

The franchise agreement must specify how the compensation is to be determined by considering these factors.

Lost profit from direct and indirect revenue

The money the franchisee would have earned from sales or other income streams during the term of the agreement had it not ended early.

Unamortised capital expenditure requested by the franchisor

For example, if a franchisor required the franchisee to buy a $20,000 coffee machine designed to last 10 years, but then ended the agreement in year 3.

Loss of opportunity in selling established goodwill

The value of the business’s established reputation or customer base that the franchisee cannot sell because the agreement ended.

Costs of winding up the franchised business

Costs such as paying off leases, reinstating and makegood of the premises, staff entitlements, and accounting fees.

Buy back provision

When an agreement is terminated for one of the specific early termination reasons, it must allow for the franchisee to return and the franchisor to accept or buy back or compensate the franchisee for the following:

• All outstanding stock purchased by the franchisee that was specified by the franchisor and required to operate the franchise under the franchise agreement or operations manual.
• All the essential specialty equipment, branded product or merchandise purchased by the franchisee, provided that:
  • it was specified by the franchisor and required to operate the franchise in accordance with the franchise agreement or operations manual, and
  • it cannot be repurposed for a similar business.

How termination rights apply to lease and other agreements

Termination rights only allows the franchisee to end their franchise agreement. These rights don't apply to leasing and other agreements.

Leasing laws are separate laws to the Franchising Code of Conduct. There are different leasing laws in each state and territory.

For help with a lease, franchisees can contact their:

• state small business commissioner
• Australian Small Business and Family Enterprise Ombudsman.

Restraint of trade clauses when an agreement ends

See also

The franchise agreement

Extending or renewing a franchise agreement

Selling or transferring a franchise agreement

Acting in good faith under the franchising code