PUBLISHED ON 27TH OF JULY 2015 ONLINE – FRANCHISING MAGAZINE
You buy a franchise, sign up for a five year term with the option to renew, and look forward to trading for years ahead. But will the agreement be automatically renewed?
The short answer is, no. There is no inherent legal right for franchise agreements to be automatically renewed, unless expressly specified.
Despite that, franchisees are frequently mistaken about the total duration of their franchise agreements, believing that the renewal term is included as an irrevocable right. However, this is not the case. Although many franchise systems offer a renewal term to franchisees as part of the total package offered, renewal is dependent on various conditions being met.
Six conditions you might need to meet:
1. The franchisee notifying the franchisor in writing of the franchisee’s intention to renew the franchise agreement within a prescribed period (between three and nine months) before the initial term expires.
This is the simplest condition to comply with and yet the easiest to be overlooked. If the franchisee does not notify the franchisor of their intention to renew at the right time, he or she may be unable to continue as a franchisee after the initial term expires.
It should be noted that the Franchising Code of Conduct requires franchisors to notify each franchisee, in writing, whether the franchisor intends to either:
- extend the agreement; or
- enter into a new agreement,
if the term of the franchise agreement is six months or longer, then at least six months before the end of the term of the agreement. This changes to one month if the franchise agreement is for less than six months.
2. Payment of a renewal fee specified in the franchise agreement.
Renewal fees range from zero up to the initial franchise fee charged by the franchisor (at the time of renewal) plus the franchisor’s legal costs of preparing renewal documents.
Any potential franchisee should review the franchise agreement presented to them to establish the total amount they will have to pay to renew.
3. The franchisee not being in breach of the franchise agreement at the time of the renewal.
If the franchisee is in breach of the franchise agreement, the franchisor would be within their rights not to renew. Non-compliant franchisees are not wanted or welcomed by any franchisors.
4. The franchisee signing the ‘then current’ franchise agreement with the franchisor, which may contain completely different terms to their original franchise agreement, including higher payment structure and other additional or unrelated obligations.
This condition is often utilised by franchisors as a way of introducing necessary change and updates to the franchise agreement and increasing fees charged.
5. Repainting, redecorating or upgrading the premises
Where a lease of premises forms part of the operation of the franchised business, it is often a condition of both the franchise agreement and the lease that the premises are repainted, redecorated or upgraded upon renewal.
6. The lease of the business premises not being renewed
The landlord may, for various reasons, not renew the lease. In that case and if there are no similar premises in close proximity available for rent, the franchise business cannot continue its operation.
It is imperative that potential franchisees review their franchise agreements before signing, and take note of the renewal terms and the requirements that will be imposed.