A common misconception among franchisees is that they will own or have the rights to their franchise business forever. However, a franchise agreement will almost always specify a particular term, for example, five or 10 years, with or without options to renew. At the end of the term, and once all options have been used, the franchise arrangement comes to an end.
Unless specified in the franchise agreement, there is no obligation on the franchisor to:
- extend the franchise term;
- buy the franchise business or any assets from the franchisee; or
- pay any compensation to the franchisee for goodwill.
If the franchisor chooses not to extend the franchise term, the franchisee should be aware of the following obligations:
- There may be a restraint of trade, meaning that the franchisee is not entitled to operate a similar business in competition with the franchise system. In some instances, this means that the franchisee may be required to shut down and walk away from the business.
- The franchisee will be required to remove anything that identifies the business as belonging to the franchise (for example, signs and marketing material).
- The franchisee must return all operations manuals, brochures and other branded documents to the franchisor.
If the franchise business operates from leased premises, it is important to consider how the end of term obligations impact upon the franchisee's obligations under the lease. There is the potential for this to be worse if the terms of the franchise agreement and lease do not match up.
It is important for franchisees to be aware of the implications of the end of the term of a franchise arrangement, prior to investing money and time in the creation of goodwill in the business.
This article is based on our experience of general practice within the franchising industry. The rights and obligations of the parties at the end of a particular franchise term will be governed by the franchise agreement.
For further information, please contact any member of the Cooper Grace Ward Franchising Law team.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.