Do I always have to pay franchise fees?

PUBLISHED ON 27TH OF NOVEMBER 2019 –  INSIDE FRANCHISE BUSINESS MAGAZINE ONLINE

“Surely I don’t have to pay fees if the franchise lets me down?” Is this fact or fiction? Let’s take a closer look…

It’s a fact of life that despite the best intentions and solvency of any franchise system, not all franchisees are running a profit and the pressure of defaulting or shortfalls in income can place considerable strain on a franchisee.

Whether your franchise is a booming success or driving you headlong into a world of debt, the franchise agreement defines your relationship with the franchisor. Whatever the issues you may have with the franchisor or the way the system operates, you must still comply with the terms of your franchise agreement, including maintaining payments to the franchisor of any agreed royalties, management fees, marketing levies and any other fees detailed in the agreement between you and the franchisor.

What should always be remembered before signing any agreement, including a franchise agreement, is it forms a legal contract containing the rights and obligations of each party. And a contract must be followed regardless of what seems equitable.

Franchise rules say you have to pay franchise fees

This hardly seems just if the cause of your downturn in business is a direct result of the actions of the franchisor. However, the Franchising Code of Conduct (Franchising Code) is clear that when a party to a franchise agreement has a dispute or disagreement with the other, both parties must follow the guidelines of the dispute resolution process set out in the Franchising Code.

So if the franchisor does something that has direct impact on your business, you, as the franchisee, can invoke the dispute resolution process. It should be remembered that involvement in a dispute resolution process does not excuse you from your obligations under the franchise agreement, whether they are payment related, or in relation to performance or other requirements, and you must continue to uphold your responsibilities until the dispute is resolved.

This means that the Franchising Code does not allow the franchisee to withhold any payments from the franchisor and any withholding of payments would be considered a violation of the terms of the franchise agreement.

Why you can’t underpay as compensation

In addition to the requirement for the franchisee to pay fees to the franchisor regardless of whether there is a dispute, most franchise agreements also contain a clause known as a set-off clause, which prevents the franchisee from only paying part of any fee owed.

Essentially, if the franchisor also owes you money, or you believe that some sort of financial compensation is owed to you as a result of the franchisor’s action, you cannot offset the amount you believe (or is) owed by the franchisor against the amount you owe to the franchisor.

For example, if the franchisee owes the franchisor $5000 but the franchisor in turn owes $2000, the franchisee is not allowed to simply pay the difference of $3000.

The franchisee must pay the full $5000 to the franchisor as agreed and contracted under the franchise agreement. The franchisee would need to engage relevant avenues to try to obtain the $2000 owed to them by the franchisor.

If you don’t pay franchise fees, that’s a breach

It should also be remembered that if a matter is ever to reach a courtroom for a decision by a judge, the franchisee must come with “clean hands”. That means if they allege breaches of the franchise agreement and the Franchising Code by the franchisor, then they should not be guilty of a similar breach.

Not paying fees would be considered a breach of the franchise agreement and therefore, although arbitrary, the judge may consider that due to their actions, the franchisee is not entitled to what they claim.

It’s important to be upfront with your franchisor about any concerns or financial struggles you might be experiencing; it can go a long way to avoiding unnecessary defaults, penalties and sleepless nights. You’ll be in a stronger position if you know the conditions imposed on you by your franchise agreement and your rights and obligations.