Home > News > Don’t get caught out by the renewal process – The franchisor’s perspective

Don’t get caught out by the renewal process – The franchisor’s perspective

Spread the love

By Joanna Bairamidis, Lawyer, MST Lawyers

The renewal of a franchise agreement is often a process overlooked or forgotten by both franchisors and franchisees until the franchise agreement is about to expire or has in fact expired. This creates uncertainty as to the contractual terms that govern the parties’ relationship and disputes often follow.

The Legal Requirements

The starting point for determining the legal requirements that apply to the renewal of a franchise agreement is the franchise agreement itself.  The franchise agreement will set out the initial term of the franchise agreement and any renewal terms.

Some franchise agreements only provide for a fixed initial term with no right of renewal.  Others provide for a fixed initial term with an option or series of options to renew.

In the case of a fixed term franchise agreement with no option to renew, the franchisor is under no obligation to renew the franchise agreement.

In the case of a franchise agreement that provides for an option or options to renew, the franchise agreement usually sets out the requirements that the franchisee must meet in order for the franchise agreement to be renewed.

The typical requirements include:

  1. The franchisee exercising the option to renew within a specific timeframe, for example, not earlier than 6 months before the expiry date and not later than 3 months before the expiry date.
  2. The payment of a renewal fee.
  3. If the franchise is a retail franchise conducted from premises, the franchisee may be required to upgrade the premises at its own cost. 
  4. The franchisee remedying any breaches of the franchise agreement, including paying any moneys owed to the franchisor and creditors.
  5. The franchisee and key employees undergoing further training.
  6. The franchisee signing a new franchise agreement usually in the form of the franchisor’s franchise agreement current at the time of the renewal.

If the above requirements are not met, then the franchisor will not be obliged to renew the franchise agreement.

For franchise agreements entered into after 1 July 2010 that have a term greater than 6 months, the Franchising Code of Conduct (“the Code”) requires a franchisor to notify its franchisee of the franchisor’s decision to renew or not renew the franchise agreement or enter into a new franchise agreement at least 6 months prior to the end of term of the franchise agreement.  If the franchise agreement is for a term of less than 6 months, the notice period is reduced to 1 month prior to the end of the term of the franchise agreement.

Whilst this requirement only applies to franchise agreements entered into after 1 July 2010, we recommend that franchisors follow best practice and provide such notice to all franchisees.

Pursuant to the Code, the franchisor must also provide the franchisee with its current disclosure document, a copy of the Code and the franchise agreement in the form in which it is to be executed, at least 14 days prior to the renewal or extension of the franchise agreement.

If the franchisor is proposing to renew a franchisee’s franchise agreement, care needs to be taken in drafting the notice to the franchisee.  Depending on the language used in the notice it may create legal relations between the parties and constitute an agreement to enter into a franchise agreement which will require compliance with the Code and in particular the disclosure obligations.

The Renewal Process

Developing a standard renewal process for the franchise network that complies with the legal requirements – the franchise agreement and the Code – will provide certainty and make it easier for franchisors to manage the renewal process.

The following are some suggestions that will allow franchisors to effectively handle the renewal process:

  1. Having software to record the critical dates – the commencement date, the expiry date and the renewal dates of each franchise agreement as well as the dates by which the franchisor must issue each franchisee with a notice of its intentions.
  2. Implementing a system where the critical dates are regularly reviewed to ensure that notices to be given under the Code are given on time and that franchise agreements do not expire without an agreement being reached as to whether or not the franchise agreement is to be renewed.
  3. Consistent and effective monitoring of the franchisees during the initial term of the franchise agreement is essential to ascertain the franchisee’s strengths, weaknesses and performance.  Implementing an ongoing review and compliance system whereby certain standard factors are checked on a regular basis and addressed with the franchisee when required, will make the decision of whether or not to renew a franchise agreement much easier.
  4. Not leaving the renewal process to the last minute.  While it is imperative that the notification periods under the Code (where applicable) are adhered to, it is also best practice to start the renewal process early.  If the franchisor has provided the franchisee with ongoing feedback and communicated the decision of whether or not the franchise agreement will be renewed with a generous lead time, disputes with the franchisee are less likely.  Early communication will allow the franchisee to make the necessary arrangements, whether this involves planning for an exit from the system or planning to continue, specifically seeking advice in respect of the new franchise documents and arranging the finance required to fund the renewal, specifically payment of any upgrade costs and any renewal fee.
  5. If a franchise agreement is to be renewed sending out the new franchise documents / renewal documents in accordance with the Code requirements.
  6. If the franchisor decides not to renew a franchise agreement, it is important that the franchisor meets with the franchisee, in order to confirm the details of the exit, specifically, what arrangements will apply to unsold stock, marketing material, plant and equipment or any other assets purchased throughout the term of the franchise agreement.  If the franchise operates from fixed premises and neither the franchisee nor the franchisee will continue operating a business from the premises following the expiry of the franchise agreement, decisions will need to be made about the make good of the premises.   It is also recommended that a Deed of Surrender and/or Release is signed by the franchisee to formalise exit requirements.

If a process is put in place and discussions between the parties commence early the decision to renew or not renew can be made well before the expiry date of the franchise agreement and avoid the uncertainty and lack of security created for both parties when a franchise agreement expires with no agreement having been reached.

It is important that franchisors seek appropriate legal advice to ensure that they are aware of their rights and obligations under the franchise agreement and the Code.

For more information about renewing your franchise agreements or any other franchising related matter, please contact our experienced Franchising team on (03) 8540 0200 or email the author of this article Joanna Bairamidis.