What to consider when terminating a franchise agreement (UK).
What is a franchise agreement?
A franchise agreement between business partners is where the franchisor agrees that the participating business / business owner agrees to distribute services or products under the brand name of the franchisor. Terminating a franchise agreement prematurely, without fulfilling obligations, is something most would wish to avoid unless it’s absolutely necessary.
What are the obligations of a franchise agreement?
The franchisor is obliged to provide a secure and functioning business that supplies products and services to the end user. The franchisor also provides a training system that allows the franchisee to deliver the provisions in the agreement. Most franchisors and franchisees observe the British Franchise Association codes of conduct and guidance. Even though a franchisor or franchisee is new to franchising, an early membership to the BFA is recommended because investors and the public are more likely to develop confidence in the franchise.
Are franchise fees refundable?
There is an initial fee in the agreement. This fee is refundable within a cooling off period after signing the contract, but not after the cooling off period unless an issue develops. If an issue develops, either party may consider terminating the franchise agreement. There is also the possibility of early termination fees or future royalties unless these can be offset against the franchisor’s actions. This is especially if there is a wrongful termination of a franchise agreement. Therefore, it is important that clauses relating to post contract are understood and accepted by both parties.
When is terminating a franchise agreement to be considered?
As with any legal contract, a franchise can be terminated if terms in the agreement are breached by either party. For example, if either party commits fraud or is in conflict with the Misrepresentation Act , or other relevant legislation. Franchisors and Franchisees should act in good faith with each other. Sometimes, though, this confidence is compromised when customers complain about the franchisee or the franchisor is facing financial difficulties themselves. The franchisee may want to sell the franchise back to the franchisor or a third party. However, the franchisor may not agree leaving the franchisee with course for legal action. The success in any legal dispute depends on the clauses for terminating a franchise agreement and the clarity of these clauses to all parties.
How to get out of a franchise agreement
Sometimes Franchisors are small businesses that are seeking to build wealth and expand their brand through the franchise model. They look for start- up business creators, or independent self-employed entrepreneurs who may not be experienced in the franchise industry. Moreover, these individuals will have intentions to make personal investments or loans and long-terms commitments into a franchise.
If you are new to franchise, you should seek legal advice early regarding your ability to sustain such an agreement. You do not want to enter any agreement and then end up considering an early termination of a franchise agreement after the cooling off period. If you need to get out of a franchise agreement after the cooling off period, seek legal consultation as early as possible. Gather your evidence for terminating your agreement and unnecessary conflict with your franchisor/ franchisee.