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What is the term of the franchise agreement?

By Stephen Haarsma on Apr 12, 2021 2:22:33 PM

Topics: For Franchisees

 

A franchise agreement outlines the conditions under which you can operate the franchise business, including how long you can operate the business for.

When buying a franchise or signing a franchise agreement it is important to consider the "term" of the franchise agreement.

 

What is the term of the Franchise Agreement?

The "term" of the franchise agreement is the period of time that you will be licensed to operate the franchise business. This can range from a number of years to a number of decades.

The term of the franchise agreement will be set out in the franchise agreement itself (generally in the schedule to the franchise agreement). The disclosure document (which is provided to you with the franchise agreement) and the Key Facts Sheet (which is also provided to you with the franchise agreement) will also set out the term of the franchise agreement. The term of the franchise agreement is often referred to as the "initial term".

If your franchise agreement contains a renewal provision you may be able to renew or extend the term of your franchise agreement. For example, a franchise agreement may have an "initial term" of 5 years and then a "renewal term" of 5 years (making a total of 10 years). However, not all franchise agreements will contain a renewal term.

If your franchise agreement does not contain a "renewal term", the franchise agreement will come to an end at the end of the "initial term" (unless the franchise agreement is terminated or ends earlier), unless the franchisor agrees to extend the franchise agreement or there is a holding over provision.

 

THe Term of the Franchise Agreement should coincide with the term of the Lease

If you are operating your franchise business from a site, where possible, the term of the franchise agreement should coincide with the term of the lease.

If the term of the franchise agreement does not coincide with the term of the lease, you will need to consider the following. 

1- Your lease expires before your franchise agreement expires

Your franchise agreement may contain provisions about what will happen if your lease is terminated or expires before your franchise agreement expires. You should check these provisions carefully, as you might be faced with a situation where the franchise agreement expires or ends earlier than the term set out in the franchise agreement.

2- Your franchise agreement expires before your lease expires

If the franchisor is the lessee under the lease, then if the franchise agreement expires, the franchisor will usually terminate the sub-lease when the franchise agreement expires.

However, if you are the lessee under the lease, and your franchise agreement is terminated or expires before your lease expires, you may be left without a franchise agreement (or the right to operate the franchise business), but still have to comply with your lease.

The provisions of any restraint of trade clause [What is a restraint of trade clause?] contained in the franchise agreement will be relevant, as the franchise agreement may include restrictions on what type of business you can operate after the franchise agreement ends. 

What if your franchise agreement contains a Renewal term? 

While your franchise agreement may contain a renewal term, if you do not comply exactly with the terms for renewal set out in your franchise agreement, you may not be able to extend or renew your franchise agreement.

It is crucial that you: 

1 - Understand time frames

Make sure you clearly understand any time frames for renewal. Most franchise agreements require the franchisee to notify the franchisor in writing, within a certain time period, if the franchisee wishes to renew the franchise agreement.

If you do not notify the franchisor within this time period it is unlikely that you will be able to renew your franchise agreement (without the consent of the franchisor).

2 - Diarise important dates

Ensure that you diarise any important renewal dates so that you are not relying on your memory.

3 - Understand the conditions for renewal

The franchise agreement will contain conditions for renewal.

Conditions can include:

  1. the payment of a renewal fee. If there is a renewal fee payable, this figure must be included in your budget forecasts.
  2. an update or upgrade of the fit out. If an update or upgrade of the fit out is required by the franchisor, you need to know exactly what is required and how much it will cost.
  3. compliance with the terms of the franchise agreement. If you have breached your franchise agreement or you owe money to the franchisor you may not be able to extend or renew your franchise agreement.
  4. entry into a new franchise agreement. The new franchise agreement may contain terms that are different to your current franchise agreement. These terms can include ongoing fees, which may increase under a new franchise agreement.

 

what is Holding Over?

A franchise agreement may contain a holding over provision.

A holding over provision allows you to continue operating the franchise business on a “holding over” basis (which is usually month to month) after the term of the franchise agreement has ended.

Typically, during the holding over period either party can terminate the franchise agreement on one months’ notice.

Check your franchise agreement carefully to see whether it includes a holding over provision. Also check whether there are any additional fees which are payable in the holding over period.

Some franchise agreements contain a “holding over fee”, which is payable in the holding over period in addition to royalties and other ongoing fees.

the Franchisor may extend the term of the franchise agreement

If a franchise agreement does not contain a renewal provision, a franchisor may extend the franchise agreement or grant another franchise agreement.

The Franchising Code of Conduct (the Franchising Code) requires franchisors to notify franchisees of whether the franchisor intends to extend the franchise agreement or grant another franchise agreement;

  1. at least six months before the expiry of the franchise agreement (if the term of the franchise agreement is more than 6 months).
  2. at least one month before the expiry of the franchise agreement (if the term of the franchise agreement is less than 6 months).



Takeaways

  • The right to operate a franchise business is limited to the "term" of the franchise agreement.
  • The franchise agreement will set out the "initial term" and any "renewal term".
  • The franchise agreement may be terminated or may end before the end of the "initial term".
  • The franchise agreement may not include a "renewal term".
  • If the franchise agreement contains a "renewal term", you must comply with the terms and conditions of the renewal provision in order the renew the franchise agreement.


What is Franchising?

Disclaimer

The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.

Stephen Haarsma

Written by Stephen Haarsma

Stephen is one of Australia's leading franchise lawyers, having acted for clients in the franchise industry for over 40 years. Stephen has assisted many well known Australian brands to franchise their business, providing not only legal but relevant and experiential commercial advice.