Can you be sued for unpaid royalties? Legal Q&A

By Sarah Stowe | 29 Oct 2015 View comments

A franchisee ready to close the doors poses the question: can a franchisee be sued for loss of royalties and required to refit the store before selling?

1. LOSS OF ROYALTIES

Franchisee: I have a franchise that has been trading at considerable loss for the last three and a half years. This business loses about $3,000 to $5,000 per month and we cannot continue to keep it trading. We want to close the doors and walk away from it but we have been informed by the franchisor that they can sue us for loss of royalties for the balance of the franchise agreement. Is that right?

Bill Morgan: The answer depends on the terms of the franchise agreement. Many franchise agreements contain a term giving this right to the franchisor.

However, franchise agreements may obtain a number of terms that relate to your rights to terminate or sell the business, and franchise agreements may contain an implied obligation that the franchisor act in good faith.

Forcing you to trade may breach the implied obligation to act in good faith. The conduct may also be unconscionable in breach of the Australian Consumer Law.

2. UNDERTAKING A REFIT

Franchisee: We have the business listed for sale but have also been informed that we are required to refit the shop before the sale, or the buyer must refit the shop after they buy it, so it is seriously affecting the saleability of the store.

Any advice?

Bill Morgan: Your reference to the franchisor compelling you to undertake a re-fit before sale of the franchise is conduct that may be questionable and unlawful. It depends if there is a term in the franchise agreement that allows the franchisor to impose this obligation before consenting to a sale of the business.

Even the insistence that you comply with of a contractual term may be unconscionable in certain circumstances. It depends on the terms of the franchise agreement and all the facts.

You have rights and you need further legal advice about your rights that takes into account the relevant facts and contract terms.

Bill Morgan is a consultant at Morgan Mac Lawyers, and has been involved in complex commercial litigation for over 20 years with particular emphases on consumer protection litigation, franchising disputes, contractual disputes, property disputes and insolvency and bankruptcy proceedings.