How to terminate a franchise agreement

There can be various situations when either the franchisor or franchisee is looking to end the franchise relationship. Often (at least when lawyers become involved) this is when communications between the parties have broken down and the parties disagree. Of course, as with any such business relationship, it is best to try to resolve any issues early on before the situation becomes one where the parties are unable to reach a solution.

In this article, corporate and commercial partner Gabi Olson-Welsh provides an overview of the key points that both franchisee and franchisers should consider when terminating an agreement.

Reviewing the franchise agreements

Most franchise agreements are generally drafted in favour of the franchisor, as the franchisor is the one that holds the business concept. Therefore, when reviewing the contact, it is worth noting that the termination provisions are likely to be weighted to the advantage of the franchisor. A franchisor should, however, be cautious when providing any advice to a franchisee, as the courts have held that it must be done with due skill and care.

Regardless of which party is looking to terminate the agreement, the provisions of the agreement should be checked carefully. In particular, consideration should be given to as to whether there is a breach by either party, which, for example, may be the case if payments have been missed or the standards set out in the agreement have not been adhered to.

Early termination rights

It may well be that there is no early termination right for the franchisee under the agreement (although the franchisee will have a common law right to terminate for repudiatory breach, whereby the aggrieved party has the right to choose either to end the contract or continue with it, if this applies) and an attempted termination may itself be a breach of the franchise agreement.

If the franchisee is able to find a new franchisee for the business, then this may assist, although it would need to be careful not to breach any confidentiality provisions of the franchise agreement and it is likely that the franchisor would have a right of first refusal to buy back the business.

Finding a new franchisee

Ideally a franchise agreement would allow the franchisor to operate the franchise as an agent for the franchisee, in the event that the franchisee ceases to operate the business. In addition, or as an alternative, a franchise agreement should contain step-in rights in order that, on termination, the franchisor can operate the business in place of the franchisee.

Practical implications of terminations

The practical implications of terminations also need to be taken into account. If the franchise will cease to exist altogether, careful consideration should be given to how this is communicated to third parties, in particular with customers who may have rights against the franchise (for example, in relation to any pre-payments that have been made) and who may be willing to accept services from another franchise if there are several franchises within the area, although this may not be possible or practical.

Property considerations

If the premises used for the franchise business are let from a landlord, early communication with the landlord and its solicitors will be important to allow for any negotiation in terms of the premises and the terms under which these are provided. Assets used in the business will also need to be considered and how these are dealt with should be set out in the franchise agreement.

Employee considerations

Finally, it is important to consider the implications on any employees who are employed in the business and to determine if the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply, which may be the case when an existing franchise is taken over.

Incoming franchisees should therefore seek appropriate TUPE indemnities from the outgoing franchisee in respect of all claims and liabilities arising under its operation of the franchise business. Similarly the franchisor should request such protection if it takes back the franchise business itself.

As with any agreement, the termination of a franchise agreement can throw up several legal issues. It is important that all parties involved take legal advice to attain the best possible outcome.