When do you need to renew your franchise agreement?
Many franchise agreements provide franchisees with the option to renew the agreement. However, it is not an automatic irrevocable right and requires certain conditions to be met prior to the renewal taking place.
Do you have to renew your agreement?
Option to renew the franchise agreement is a right and not an obligation, unless the franchise agreement contains an automatic renewal clause, which is unusual. Therefore, you can choose whether you want to continue running your franchise business or to shut up shop.
If you decide not to renew the agreement, you must understand what your obligations are to the franchisor upon the franchise agreement expiring, including return of intellectual and other property of the franchisor and restraint provisions. You must also consider when your lease is expiring at the same time, how the lease can be ended and all obligations you face at the end of the lease.
If your decision is to continue with your franchise and to renew the franchise agreement, you will have to meet all the conditions of renewal, which should be listed in your franchise agreement. In the same fashion, you will need to ensure that your lease, if you run your business from particular premises, continues to operate for the duration of the renewed period.
When can you renew the franchise agreement?
The franchise agreement will dictate the time frame when you have to advise the franchisor in relation to your decision to renew the agreement. Ii is likely to be anywhere between twelve months and three months before expiry.
Please note that the franchisor must, as dictated by the Franchising Code of Conduct, advise its franchisees at least six months before expiry of the franchise agreement (for agreements which last for six months or longer) whether the franchisor intends to extend the franchise agreement or enter into a new agreement.
A failure by the franchisor to follow these Franchising Code of Conduct requirements may result in fines (if prosecuted by the regulating body the Australian Competition and Consumer Commission) as well as the parts of restraint provisions being rendered unenforceable.
What’s involved in the process
The renewal process is between the franchisor and the franchisee (unless there is a master franchisee involved, in which case it depends on the parties to the original franchise agreement). The procedure is usually listed in one of the clauses to the franchise agreement and may involve the following:
- The franchisee signing the then current franchise agreement, which may contain very different terms and conditions to the original franchise agreement, including higher royalty and other payments and other new or amended conditions;
- Payment of a renewal fee, which would be specified in the franchise agreement and which often includes payment of the franchisor’s legal costs of issuing renewal documentation; and
- The franchisee not being in breach of the franchise agreement.
There may be many other conditions of renewal and the original franchise agreement must be thoroughly reviewed to ensure that all conditions are met on the franchisee’s part.
Should you get legal advice?
Before you sign any document or undertake any business venture, it is highly recommended that you obtain legal advice. At the signing of the original franchise agreement your lawyer should be able to advise you of your rights and obligations upon renewal.
Your lawyer can also review your franchise agreement at the renewal stage and provide you with advice on what to do next. You should get advice at least 12 months before the expiry of the agreement to ensure strict compliance and to avoid missing any crucial dates.
Things to check about the renewal before you sign up to a franchise
Before signing the franchise agreement, you and your lawyer must look through the renewal clause to ensure it is reasonable.
For example, some agreements may contain an automatic renewal clause, in which case you will not get a say about continuing with the business following the initial term. You may also want to lock in a low renewal fee and a fixed legal fee for the franchisor’s legal expenses, which you will be liable for upon renewal.
Lastly, you must understand what form of agreement you will be required to sign on renewal, which, in most cases, is the “then current form” of the agreement.