What happens when it's time to renew your Franchise Agreement?
All agreements with franchisors have a term, after which both parties must seek to renew in order to maintain a continuing relationship. As a franchisee, what issues can you expect to arise in extending your Franchise Agreement?
Most Franchise Agreements run for an initial five year term - although this may be as much as 10 years where the franchisor holds a headlease of the premises used in the business and grants a sub-lease to the franchisee. The Franchise Agreement will always contain rights to renew the franchise for one or more further five year terms and the basis upon which such renewal will be granted will be clearly set out in it.
Invariably no specific limit is placed upon the number of renewals that may be granted since it is in the franchisor's interests to retain good franchisees in its network. The franchisor's profit is principally made from its management services fees charged as a percentage of the franchisee's turnover and not from the initial fees payable on the grant of Franchise Agreements.
It was formerly the case that franchisors would not charge a fee on renewal beyond recovering from the franchisee its administrative and legal costs of affecting the renewal but in recent years renewal fees have crept into an increasing number of Franchise Agreements. Such sums tend to be modest and not charged until after the second or third renewal. Such a charge is not unlike a premium being charged by a Landlord with a prime retail property. It is, therefore, unusual to find such renewal fees charged by franchisees whose brands are not strongly established and widely recognised.
Franchisees should note carefully the requirements in their Agreements to give notice of their intention to renew the franchise. Renewal will be conditional upon the franchisee having complied with specified obligations. These may include a requirement that there be no outstanding material breaches of the Franchise Agreement and those circumstances existing that would entitle the franchisor to terminate it. The franchisee will be expected to execute a new Agreement before the expiry of the old one and will usually be required to pay the franchisor's reasonable legal and administrative costs of renewal.
The franchisee may be obliged to comply with any request by the franchisor to replace equipment, or a vehicle, refresh display equipment or refurbish premises. It would be prudent for franchisees to identify, when taking up a franchise, what the renewal obligations are likely to be so that these can be budgeted for throughout the term of the Agreement. There may be an obligation upon renewal for the franchisee or any specified staff to undertake additional or refresher training.
Invariably the new Franchise Agreement will be on the same terms as those of the current standard form of Franchise Agreement used by the franchisor for new franchisees. It will, however, need to take account of the fact that the Agreement relates to a renewal and, therefore, the initial obligations upon the parties under it will not be relevant. Exclusion of these obligations is normally effected by a short Side Letter or Supplemental Deed or by noting the non compliance of such clauses within the Agreement itself.
It is important that franchisees note carefully any changes to the Agreement that may have been made since their original Franchise Agreement was granted, particularly where such changes involve commercial terms. This is especially important where the franchisee is considering retirement and looking for a buyer for his business
It is in both parties' interests for the renewal process to be completed as smoothly as possible and most franchisors will detail the procedure in their Operations Manuals and communicate early with franchisees on renewal obligations.
Written by Jonathan Chadd