Legal Brief - What are your rights to renew?
Signing your franchise contract can be the first step to an exciting and rewarding future. But what happens when the contract expires? Manzoor Ishani, Senior Consultant Solicitor with Sherrards, reveals the secrets of right to renew
Most franchise agreements are for a specific period (e.g. five years), a few have no fixed period and continue on an ongoing basis (usually until terminated by either party), but many are expressed to be for a specific period with a right for the franchisee to renew the agreement when that period expires.
Contracts which have no fixed period but which can be terminated by either party are rare because franchisees are reluctant to make an investment unless they can be certain that theyhave the rights for a minimum period, and franchisors are reluctant to make an investment in training a franchisee and putting him into business if the whole arrangement can be terminated at any time.
There is nothing wrong in practice with franchise agreements which run for a fixed period, providing the period is long enough for a franchisee to recoup his investment and have sufficient time to enjoy an adequate return on that investment. Whatever the contract may say, it is always open, at the end of the fixed term, for the parties to agree to continue the arrangement. In these circumstances there will always be some uncertainty for both parties.
Nevertheless, for various reasons some franchisors continue to issue fixed term contracts with no rights of renewal so that at the end of the fixed term the arrangement comes to an end and the franchisee ceases to be a franchisee. What happens thereafter to the franchisee's business, to the value of his investment and so on will depend entirely upon the terms of the franchise agreement, which should contain detailed provisions as to what should happen in these circumstances.
Generally speaking, fixed period agreements with no renewal tend to be for longer than five years - usually 10 or 20 years. From the franchisor's point of view, it has the comfort of knowing that once the franchisee has signed the agreement, he will be there for the fixed period and this helps with planning. Franchisees also have the comfort of knowing that they are in the business for the long term. A big disadvantage for a franchisor in these circumstances is that it is very difficult, if not impossible, for a franchisor to update the franchise agreement and introduce changes in the light of experience.
'Right to renew' is a term loosely used by franchisors and franchisees alike. Franchisees understand this term to mean literally what it says, i.e. that at the end of the term of the franchise agreement, they would have a right to renew that agreement. That is not what most franchise agreements say. Most provide that when the current franchise agreement expires, the franchisee may be able to continue as a franchisee provided he satisfies certain conditions and enters into a new agreement with the franchisor. That is not the same as a franchisee carrying on under the old agreement for a further term.
For the franchisor it is important to retain control over the renewal process and franchisors would certainly not wish to be forced to renew a franchise agreement in circumstances where a franchisee is in breach of contract. Therefore the accepted norm these days is for rights of renewal to be expressed in such a way that the franchisee has an option to decide whether or not he wants to continue in that franchised business and, if so, has the right to do so provided he satisfies certain conditions laid down by the franchisor.
On any such renewal, there will be very few initial obligations on either party. Many of the services, such as initial training, launching the business, etc., which the franchisor provides to a new franchisee will not be needed for an existing franchisee who is renewing. Under the circumstances few franchisors can justify asking franchisees for another initial franchise fee on renewal. It is true that franchisors will incur some expense and costs in going through the renewal process, but this would be a fraction of the initial franchise fee being charged by the franchisor to new franchisees.
In terms of pitfalls, franchisees should look carefully at exactly what rights of renewal mean, if any conditions are attached to renewal, and whether there is a cost to the franchisee.Pitfalls for a franchisor to avoid are arrangements which might give a franchisee an automatic right of renewal.