Mason Sier Turnbull highlights the need to seek legal advice when considering a franchise agreement

Louise Wolf from Mason Sier Turnbull provides legal advice on what new franchisees should be looking for in the fine print of a franchise agreement.

It is critical when considering a franchise agreement that potential business owners seek appropriate legal advice, but there are several considerations a franchisee should be looking for in the fine print of a typical franchise agreement that can be discussed.

Firstly, it is important to consider what rights are actually granted under the agreement. Franchisees should note whether the franchise is for a specific territory, or limited to a particular site and whether the territory (where offered) is exclusive.

If the franchisor offers exclusive territories, the provisions in the franchise agreement dealing with the territory need to be examined carefully because often there are exclusions.

The franchisor may:

• reserve to itself the right to conduct business over the internet selling products or services available in the franchise online
• reserve to itself the right to sell products available in the franchise business from non branded outlets (eg in supermarkets or departments stores); or
• be entitled to alter the territory in certain circumstances such as failure to meet minimum performance requirements.

Another important consideration when reviewing a franchise agreement is with regard to termination provisions. Most franchise agreements do not specify the grounds upon which a franchisee can terminate the agreement.

In these cases, even if the franchisor is in breach the franchise agreement, generally speaking, the franchisee does not have a contractual right to terminate and may have to rely upon the common law or the Trade Practices law for a remedy.

This is time consuming and costly.

Conversely, a typical franchise agreement and the Franchise Code of Conduct provide various methods by which a franchisor can terminate a franchise agreement.

Clause 23(g) of the Code specifies seven grounds upon which it is legitimate for a franchisor to terminate a franchise agreement immediately, for example the franchisee abandoning the franchisee or being guilty of fraud.

When negotiating the terms of a franchise agreement, the franchisee’s lawyer should aim to confine the grounds for immediate termination to those grounds set out in clause 23(g) of the Code.

They should also endeavour to codify a clause that allows the franchisee to give notice of breach to the franchisor, providing such notice to require the breach be remedied within a reasonable time, failing which the franchisee should be entitled to terminate the franchise agreements.

Should a franchisee wish to transfer or sell their franchise business, the consent of the franchisor is required. The Franchising Code of Conduct requires that a franchisor act reasonably in giving their consent in this situation, and also sets out some grounds upon which the franchisor can refuse consent.

The costs associated with selling a franchise business can be substantial. A franchisee may be required to pay the costs accrued by the franchisor associated with:

• investigating the prospective purchaser and approving them
• the franchisor's legal costs associated with terminating the existing franchise agreement and entering into a new franchise agreement with the new franchisee
• the cost of training the new franchisee; and
• often a transfer fee.

Many franchise agreements neglect to deal with the issue of franchisor insolvency, the incidence of which in recent years highlights the need for franchisees to educate themselves on what happens to their investment if it occurs.

Franchisees should be requesting clauses to better protect themselves from insolvency, such as requirements that:

• the head lease (where relevant) be held by the franchisee
• the franchisee be entitled to terminate the franchise agreement if the franchisor becomes insolvent
• the restraint clauses be waived in the event of franchisor insolvency; and
• the franchisee be permitted to "debadge" the premises and continue trading from the premises.

The governing law of and jurisdiction set out in the franchise agreement may be the law of another state or territory in Australia or in the case of a foreign franchisor, the law of another country.

This may mean that a franchisee is required to travel interstate or overseas to initiate and defend proceedings or attend mediation. Where possible the governing law should be the law of the state or territory in which the franchise operates.

This is by no means an exhaustive list of the key provisions that should be taken into consideration before entering into a franchise agreement.

Legal advice should be sought from a lawyer experienced in franchising law to assist in wading through the fine print and ensuring that the advice obtained is practical and cost effective.

Franchising lawyers from Mason Sier Turnbull can be contacted for further information.