Legal advice on franchise agreement terminations from Mason Sier Turnbull

Nick Rimington from Mason Sier Turnbull provides legal advice on some of the common grounds for termination of franchise agreements, the termination process and the protections afforded to franchisees under the Franchising Code of Conduct.

Generally, the most common grounds for termination of a franchise agreement are with regard to a failure by a franchisee to pay moneys due under the franchise agreement. This can include fees or royalties to the franchisor or rental payments to the landlord.

These liabilities are often amongst the major overheads for a franchise business, and it can be easy for franchisees to fall into arrears on these grounds when money is tight.

Unfortunately, these are also the easiest grounds on which a franchise agreement can be terminated, because it is easy to prove both the existence of the obligation under a franchise agreement and the failure to pay.

Where a franchisor desires to terminate a franchise agreement, and conditions for immediate termination are not met, the franchisor must comply with several requirements in the agreement itself and under the Franchising Code of Conduct.

Prior to terminating a franchise agreement, the franchisor must send a breach notice to the franchisee which sets out:

• the clauses of the franchise agreement which the franchisee has breached
• the particulars of the alleged breaches
• what the franchisee needs to do in order to remedy the breaches
• the timeframe in which the franchisee must remedy the breaches (this must be a reasonable time, but does not need to exceed 30 days); and
• that the franchise agreement will be terminated if the franchisee fails to remedy the breaches within the specified timeframe.

If the breach notice does not comply with the requirements under the Franchising Code of Conduct, upon seeking legal advice a franchisee may be able to argue that the notice was defective, and hence have it set aside.

A common area where arguments arise is related to whether the timeframe to remedy the breaches proposed is reasonable.

Where the franchisor proceeds to terminate the franchise agreement on the basis of a defective breach notice, the courts may overturn the termination.

There are certain grounds under the Code by which a franchisor may immediately terminate a franchise agreement. In these circumstances, the franchisor does not need to follow the breach notice procedure, and is entitled to issue a termination notice with immediate effect.

Some of the grounds that allow for immediate termination under the Code include where the franchisee:

• voluntarily abandons the franchised business
• becomes bankrupt
• operates the franchised business in a way that endangers public health and safety; or
• is fraudulent in connection with the franchised business.

For example, the franchisor will often have right to sue the terminated franchisee for outstanding money and damages for losses arising out of the termination.

Where a franchisee holds the lease to a premises, these obligations may remain even though the franchisee no longer has the right to operate the business.

In addition, regardless of whether or not the franchisee holds the lease personally, upon leaving the premises they may be responsible for performing ‘make good works’ to restore the premises to a lettable condition.

Many franchise agreements also impost restraints of trade on franchisees, restricting the ability to conduct a similar business within a certain geographical area for a certain timeframe.

The above are just some of the potential consequences that may arise from the termination of a franchise agreement, but it is important to understand that termination does not allow a franchisee to walk away from the business without repercussions.

If faced with a breach notice, it is important that a franchisee discusses with their franchisor exactly what needs to be done in order to remedy the breach. If there is a concern that the breach notice does not comply with the Code, the franchisee should seek legal advice on how to address this.

The same applies if a franchisee is issued with a termination notice. If there is grounds for suspecting that a franchise has been improperly terminated, a franchisee should immediately seek legal advice from a lawyers as to their rights against the franchisor.

Franchising lawyers at Mason Sier Turnbull are available to discuss any concerns regarding the termination of a franchise, or any other franchising question that may be of concern.