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Ways of ending a franchise agreement
In a typical franchise agreement, there are usually many reasons why the franchisor can terminate the agreement early. This is the case even when the franchisee hasn’t broken the agreement. However, there is usually very limited ability for a franchisee to end the agreement early.
Potential 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.
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.
There are also ways to terminate a franchise agreement after receiving lease information at the beginning of a franchise agreement.
Early termination and telling the other party
When the franchisor wants to terminate
If a franchisor wants to terminate the agreement, they must always follow the processes set out in the franchising code before they can terminate.
For example, if a franchisor wants to terminate a franchisee because they have breached their agreement, the process in the code includes that the franchisor must give the franchisee a reasonable time to remedy the breach. If the franchisee fixes the breach, the franchisor can't terminate the agreement because of that breach.
When a franchisee wants to terminate
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.
Notice periods for terminating an agreement because of particular grounds
Agreement entered into before 1 July 2021
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.
For example, a franchise agreement may allow the franchisor to terminate the agreement early if the franchisee becomes insolvent. This is one of the ‘particular grounds’ for termination where the code allows franchisors to terminate immediately.
Agreement entered into on or after 1 July 2021
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 in relation to the proposed termination, the franchisor must not terminate the agreement for 28 days. This gives the franchisee time to try to resolve the dispute.
Obligation to act in good faith
Good faith is still required if the agreement is ending.
The obligation for franchisors and franchisees to act in good faith extends to all aspects of the franchising relationship, including at the end of an agreement and during the termination process.
The obligation to act in good faith may continue even after the agreement comes to an end. For example, if you have obligations under the agreement that will continue after the agreement comes to an end, you may be required to perform these obligations in good faith.