Options on a loss making franchise

By Sarah Stowe | 29 Oct 2015 View comments

Question: I have a franchise that has been trading at considerable loss for the last 3.5 years. This business loses approx. 3k – 5k 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 (18months). Is that right? Surely they cannot force a business to continue to trade at these losses. The franchisor does nothing to support the franchise, in fact they seem to have no obligations except to collect royalties. They do absolutely nothing for our business. They make stupid decisions that affect our turnover and expenses without consultation with any franchisees and the list goes on. We have it 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?

Answer: Your first question is whether the franchisor may sue you for unpaid royalties for the rest of the franchise term if you walk away from the franchise before the expiry of the franchise term. 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.

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.