LEAV­ING ON YOUR TERMS

Inside Franchise Business - - Franchise Basics - BLAKE PALMER

Fran­chise agree­ments are of­ten for five years or more. Get­ting into one is easy enough, but try­ing to get out of one is less

straight­for­ward.

Bound­aries have been set and rules put in place that di­rect how a fran­chise agree­ment can be en­acted. The ACCC reg­u­lates the manda­tory in­dus­try code, the Aus­tralian Fran­chis­ing Code of Con­duct, that ap­plies to the par­ties in a fran­chise agree­ment.

Gen­er­ally, fran­chise agree­ments can­not be ter­mi­nated by a fran­chisee. The one ob­vi­ous ex­cep­tion to the rule is a change of mind shortly af­ter en­ter­ing into the agree­ment. The code al­lows for a seven-day cool­ing-off pe­riod, and this would be re­flected in your fran­chise agree­ment.

Once out­side the cool­ing-off pe­riod, your op­tions to exit the fran­chise are lim­ited, but in­clude:

• Sur­ren­der­ing your fran­chise back to the fran­chisor • Trans­fer­ring/sell­ing to a third party with the

fran­chisor’s con­sent

• Es­tab­lish­ing a fran­chisor breach of the fran­chise

agree­ment

• Aban­don­ment.

SUR­REN­DER TO THE FRAN­CHISOR

Sur­ren­der­ing your fran­chise to the fran­chisor is the eas­i­est and fastest way to exit your fran­chise agree­ment. They are un­der no obli­ga­tion to en­ter­tain it, but it may be that the fran­chisor is open to the idea of let­ting you exit as they might want to take over the busi­ness them­selves, or they may have other po­ten­tial fran­chisees avail­able to take it over.

How­ever, you should be aware that a sur­ren­der will of­ten en­tail mak­ing an exit pay­ment to com­pen­sate the fran­chisor for fu­ture lost fran­chise fees/roy­al­ties. On the other hand, if you have con­trib­uted fi­nan­cially to a fit-out of the busi­ness premises, you may be able to set off that amount against any exit pay­ment the fran­chisor may wish to im­pose.

E ither w ay, y ou w ill a sked t o s ign a n a gree­ment sur­ren­der­ing your fran­chise agree­ment from a par­tic­u­lar date. The deed of sur­ren­der will usu­ally con­tain a re­lease of the fran­chisee en­tity (whether cor­po­rate, trust or in­di­vid­ual) and its guar­an­tors from their obli­ga­tions un­der the fran­chise agree­ment. Of course, you should ob­tain le­gal ad­vice if you are not clear about any as­pect of your exit.

TRANS­FER OR SALE TO THIRD PARTY

Rather than sur­ren­der­ing your fran­chise to the fran­chisor, you may wish to sell your busi­ness on the open mar­ket. The code per­mits you to re­quest a trans­fer (sale) of your fran­chise, and a clause in your fran­chise agree­ment will re­flects the code’s stip­u­la­tions.

Es­sen­tially, the process in­volves you giv­ing the fran­chisor writ­ten no­tice of your pro­posed trans­fer, plus all the nec­es­sary in­for­ma­tion for them to make an in­formed de­ci­sion. In­for­ma­tion you need to pro­vide the fran­chisor in­cludes...

• When the pro­posed trans­fer/sale is sched­uled to

take place

• De­tails of the pro­posed trans­feree

• What ex­pe­ri­ence (if any) the pro­posed trans­feree has

in run­ning a sim­i­lar busi­ness

• What ca­pac­ity the pro­posed trans­feree has to meet

the fi­nan­cial obli­ga­tions that come with the fran­chise • Whether the land­lord, if you are the ten­ant of the fran­chise premises, con­sents to an as­sign­ment of the lease to the pro­posed trans­feree.

Once armed with all the nec­es­sary in­for­ma­tion, the fran­chisor must not un­rea­son­ably with­hold con­sent for the trans­fer.

There is a list of rea­sons in the code that ex­plain when a fran­chisor may rea­son­ably with­hold con­sent. The main ones are... • The pro­posed trans­feree is not ap­pro­pri­ately ex­pe­ri­enced in the type of busi­ness the fran­chisor runs, or is not likely to be able to meet the fi­nan­cial obli­ga­tions of the fran­chise

• You are in breach of your fran­chise agree­ment in some im­por­tant way that has not been (and will not be) reme­died be­fore the pro­posed trans­fer.

When you have the fran­chisor’s con­sent (and that of the land­lord if re­quired), it is then rec­om­mended you en­gage pro­fes­sional help for pre­par­ing the pa­per­work. You will need to en­ter into a con­tract for the sale of busi­ness with the pro­posed pur­chaser, and you may also need a deed of ter­mi­na­tion with the fran­chisor. A so­lic­i­tor ex­pe­ri­enced in fran­chise law is best placed to ne­go­ti­ate the terms of those doc­u­ments on your be­half.

FRAN­CHISOR BREACHES

While your fran­chise agree­ment will gen­er­ally not con­tain a spe­cific right for you to ter­mi­nate it, this may still be pos­si­ble if the fran­chisor is in breach of an es­sen­tial term of the agree­ment, or is in breach of Aus­tralian con­sumer law. An ex­am­ple would be mis­rep­re­sent­ing the prof­itabil­ity of the fran­chise busi­ness be­fore you en­tered into the fran­chise agree­ment.

I f y ou a re i n t hat p os­i­tion, y ou c an use the dis­pute res­o­lu­tion pro­ce­dure pre­scribed in your fran­chise agree­ment to, even­tu­ally, give no­tice of ter­mi­na­tion. Your abil­ity to do that will de­pend on the se­ri­ous­ness of the fran­chisor’s breach and whether any­thing has been done to rem­edy it.

I f y ou h ave t er­mi­nated y our f ran­chise agree­ment for a fran­chisor breach, you may then start court pro­ceed­ings against the fran­chisor and seek dam­ages. For ex­am­ple, you might seek to re­cover the money you have lost by in­vest­ing in the fran­chise, and prof­its you might have oth­er­wise made but for the fran­chisor’s breach. Again, these are mat­ters on which you should first ob­tain le­gal ad­vice.

ABAN­DON­MENT

As a last re­sort, you may sim­ply want to close the doors of your busi­ness and walk out. How­ever, if you do so, you po­ten­tially face the fol­low­ing ac­tions...

• The fran­chisor im­me­di­ately ter­mi­nat­ing your fran­chise agree­ment, as en­ti­tled by the code

• The fran­chisor pur­su­ing you for the fees it would have oth­er­wise re­ceived dur­ing the bal­ance of the term of the fran­chise agree­ment

• The land­lord pur­su­ing you for break­ing the lease, and for rent and out­go­ings un­til the end of the term of the lease, or if the fran­chisor is the lease ten­ant, you be­ing pur­sued un­der the li­cence or sub-lease you hold with them, for un­paid rent and out­go­ings un­til a new fran­chisee is se­cured.

FRAN­CHISOR-INI­TI­ATED EXIT

The cir­cum­stances in which a fran­chisor may ter­mi­nate a fran­chise agree­ment are more straight­for­ward. A fran­chisor may have a right writ­ten into the fran­chise agree­ment whereby it can ter­mi­nate upon giv­ing the fran­chisee a writ­ten no­tice ex­plain­ing the rea­sons.

More com­monly, a fran­chisor’s right to ter­mi­nate the agree­ment will arise from ei­ther:

• Fran­chisee breach of the agree­ment • Spe­cial cir­cum­stances

• Non-re­newal

FRAN­CHISEE BREACH

When a fran­chisee is in breach of one or more obli­ga­tions un­der the fran­chise agree­ment, the fran­chisor must send the fran­chisee a writ­ten no­tice un­der the code that:

• Ex­plains the na­ture of the breach un­der the fran­chise agree­ment

Tells the fran­chisee what needs to done to rem­edy the breach

• Al­lows a rea­son­able pe­riod (up to 30 days)

to rem­edy the breach

• Ad­vises the fran­chisee that the agree­ment will be ter­mi­nated if the breach is not reme­died.

If the breach is reme­died in ac­cor­dance with the no­tice, the fran­chisor can­not ter­mi­nate the agree­ment. If there is a dis­pute about the na­ture of the breach, a fran­chisee may have it re­ferred for me­di­a­tion un­der the dis­pute res­o­lu­tion process stip­u­lated in the code.

SPE­CIAL CIR­CUM­STANCES

A fran­chisor is not obliged to fol­low this process when there are spe­cial cir­cum­stances, such as:

• When the fran­chisee does not hold the

rel­e­vant li­cence to run the fran­chise • When the fran­chisee be­comes in­sol­vent • When the fran­chisee aban­dons the

busi­ness

• When the fran­chisee is con­victed of a se­ri­ous of­fence

If the fran­chisee is run­ning the fran­chise in a man­ner that is dan­ger­ous to pub­lic health and/or safety.

If the fran­chisee com­mits fraud in his ca­pac­ity as fran­chisee

• When the fran­chisee agrees to ter­mi­nate.

NON-RE­NEWAL

It should also be noted that the code does not give fran­chisees an au­to­matic right to re­new or ex­tend their fran­chise agree­ment, or en­ter into a new agree­ment af­ter the ini­tial term has ex­pired. Whether that right ex­ists will de­pend on the spe­cific terms of the fran­chise agree­ment as ne­go­ti­ated by the par­ties.

If an agree­ment has no right to re­new writ­ten into it, it will ter­mi­nate nat­u­rally at the end of its term.

FI­NAL WARN­ING: INSOLVENCY

Fi­nally, both par­ties to a fran­chise agree­ment should be wary of how insolvency might af­fect them. Gen­er­ally, a per­son or a com­pany is in­sol­vent if it can­not pay bills as and when they fall due.

For a fran­chisee, the im­me­di­ate prob­lem if you be­come in­sol­vent is that the fran­chise agree­ment will per­mit the fran­chisor to im­me­di­ately ter­mi­nate the agree­ment.

If a fran­chisor be­comes in­sol­vent, it may have a wide range of dis­as­trous con­se­quences for fran­chisees, in­clud­ing:

• Los­ing your right to trade us­ing the

fran­chisor’s brand

• Los­ing the right of oc­cu­pa­tion un­der sub-leases or li­cences where the fran­chisor holds the head lease • Re­main­ing li­able to sup­pli­ers, land­lords, staff and lenders af­ter your abil­ity to trade is lost.

Whether you are fran­chisee or fran­chisor, if you are a di­rec­tor of an in­sol­vent com­pany, you may be per­son­ally li­able for the debts ac­crued by the com­pany dur­ing the pe­riod in which you al­lowed it to keep trad­ing while in­sol­vent.

The law pro­vides sev­eral reme­dies for po­ten­tial insolvency sit­u­a­tions, so it is im­per­a­tive you ob­tain ex­pert le­gal and ac­count­ing ad­vice if you think you are head­ing down that path.

Part­ner and head of lit­i­ga­tion, Bay­bridge Lawyers

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