The Franchise Agreement Series

Key Clauses – Termination

The second instalment in a three-part series of articles which focus on the key clauses within franchise agreements.  This article looks at the complexities surrounding the termination of a franchise.

As with most things in life the relationship between a franchisor and a franchisee will come to an end one day.  There are various reasons which may lead to this such as the franchise agreement expiring; a franchisee wishing to sell; the parties agreeing to mutually exit or the franchise agreement being terminated prior to the end of the term of the franchise.

Termination prior to the end of the franchise agreement is never undertake without lengthy consideration and fair warning where appropriate. The circumstances which will allow a franchisor to terminate should be clearly set down in the franchise agreement and will usually relate to some form of breach on the part of the franchisee.

Whenever a franchisee is deemed to be in breach of their franchise agreement they should firstly be notified in writing by the franchisor of the nature of the breach and allowed, if deemed appropriate, a reasonable period of time to remedy the breach. This period of time will vary dependant on the seriousness of the breach, how long the breach will take to be remedied and how quickly the breach needs to be remedied.

There will, on some occasions, be circumstances of a serious breach whereby a franchisor may terminate the franchise agreement immediately without giving a franchisee a reasonable period of time to remedy. Serious breaches can arise in the event that a franchisee is misusing the brand, becomes insolvent or bankrupt or ceases to trade.  Immediate termination can also arise if a franchisee has received a written notice from the franchisor to remedy a breach and then subsequently fails to comply with such notice.  Another reason for an immediate termination would be if a franchisee commits repeated breaches over a certain period of time, for example two or three breaches within a twelve month period.

It is not common for the franchise agreement to grant a franchisee the right to terminate as this right is usually only reserved for the franchisor. However, this does not prevent a franchisee from having the right to terminate in the event that a franchisor is in fundamental or repudiatory breach of the franchise agreement or has misrepresented certain information, such as financial performance and the franchisee has relied upon such representations.

Regardless of whether a franchise agreement is terminated amicably or contentiously there will be certain post termination obligations which a franchisee must adhere to.  Typically these obligations will include:

  • To cease using the franchisor’s intellectual property. Intellectual property will include such things as the operations manual, domain names, trade secrets, copyright, patents, design rights, databases, trade marks, trade name and any other matter indicative of any association with the franchisor or the franchise network.  If the franchisee has a branded vehicle and/or premises any signage and/or branding will also need to be removed.
  • To pay to the franchisor all outstanding sums due under the franchise agreement.
  • To return or surrender any tangible and intangible items belonging to the franchisor.
  • Vacating any premises from where the franchise is operated (this would not apply in the case of a franchisee’s residential premises).
  • Restrictions on the franchisee including non-disclosure of confidential information and non-competition and non-solicitation undertakings. Confidentiality restrictions may last for a certain period of time or indefinitely.  Non-competition and non-solicitation undertakings usually last between six and twelve months and tend to have a geographical scope.  Such restrictions must however be deemed reasonable and should not restrain a franchisee’s right to trade.
  • The right by the franchisor to buy back the franchisee’s assets. The consideration payable for the assets (which includes physical assets such as stock, equipment, fittings and fixtures) will be based on the net written down value.  Goodwill or going concern value is excluded from the calculation.  If a valuation for the assets cannot be agreed, the franchisor and the franchisee can agree to appoint or have nominated an independent valuer.
  • The right of the franchisor to take over the running of the franchise business. This will usually be an interim arrangement for set period of time.  Thereafter, the franchisor would cease running the business or buy back the assets belonging to the franchisee.
  • The right by the franchisor to have a lien over any monies or other property of the franchisee which the franchisor holds or receives for any amounts which are due or owed or any damages that may be due to the franchisor.

Whilst termination should be regarded as a “last resort”, if a franchisor’s brand is at risk of damage they must be able to take any necessary action to protect the brand for their own benefit and that of the other franchisees within the network.  Franchisees can also avoid the risk of termination by simply complying with the franchisor’s instructions in the operation of the franchise and adhering to the terms of the franchise agreement.

This article was brought to you by Tracy Williamson, Associate at Ashtons Legal. Ashtons Legal is a full-service law firm which puts the client at the heart of everything it does.

The Ashtons Legal franchise department has over 20 years’ experience in assisting franchise networks across the UK and internationally.