LEAVING ON YOUR TERMS
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
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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.
•
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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.