One area of uncertainty with prospective franchisees is how long their franchise agreement will operate. Sometimes this is quite straightforward, but not always. As franchisees often ask us this question, we will summarise the key issues.
Where do you look?
The starting point is always the franchise agreement. It sets out the parties’ obligations, rights and responsibilities. In broad terms, franchise agreements deal with:
- the grant of the franchise and any conditions attached to the grant of the franchise to the franchisee (including, for example, territory restrictions);
- the term of the franchise agreement and the right, if any, for the franchisee to renew the agreement, as well as the conditions the franchisee must satisfy to be able to renew the agreement.
Do Franchise Agreements operate for a fixed period of time?
Most Franchise Agreements operate for a fixed term. It is important to understand how long your agreement lasts and whether you have the right to renew the agreement. The term of the agreement should be long enough to recover your investment and repay capital loans associated with the purchase of the franchise, as well as make a profit.
How long do most agreements run?
The initial term is generally between 3 to 5 years with an option to renew. This is usually sufficient to satisfy the requirements of financiers without placing an overly onerous obligation on the franchisee to continue to operate the business for an extended period of time.
How do you renew a Franchise Agreement?
Renewal of the franchise is usually provided by way of an option to renew which, if exercised, allows you to continue to operate your franchise for an extended period.
If there is an option to renew, the franchise agreement will generally impose conditions you must satisfy in order to exercise the option including that:
- there be no outstanding breaches on the part of the franchisee;
- the franchisee signs a new franchise agreement;
- the lease of the premises is renewed;
- the franchisee upgrade signage and refurbish premises; and
- the franchisee pay a renewal fee.
What happens if you run out of time?
Once all the option periods of the franchise expire, as a franchise owner you have no right to continue operating under the franchise agreement. Most franchise agreements provide that when all of the option periods have expired (or if the option to renew is not exercised) that all of the rights under the agreement cease automatically.
In You have no right to continue to operate the business and must essentially "walk away". It is therefore important to work out well in advance whether you can negotiate another term with your franchisor, or otherwise sell the business while there is still some time remaining under the Franchise Agreement.
What you need to do
It is vital that you understand the terms and conditions of your franchise agreement, including all the provisions that relate to how long your agreement will run. Misunderstandings about this issue can cause great hardship and distress for you and disharmony with the franchisor. Don't get caught short.
How we can help
We regularly receive referrals to help clients in relation to retail and commercial leasing and franchising matters. Clients are referred to us because of our experience in the franchising industry and our commercial and pragmatic approach to helping our clients.
Contact Peter McLaughlin or Toni Perkins at redchip lawyers on 07 3852 5055 or email PeterM@redchip.com.au or firstname.lastname@example.org to discuss how we can help you.
This article is a summary of a chapter from "Buying your Franchise", book 1 in the ‘Shaking the Profits from Franchising’ book series. Please contact us if you would like to purchase a copy.