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What is the term of the franchise agreement?

By Stephen on Apr 12, 2021 12:52:33 AM

Topics: For Franchisees

 

It is important to consider the term of the franchise agreement when buying a franchise or signing a franchise agreement.

The term of the franchise agreement will be set out in the franchise agreement itself (generally in the schedule to the franchise agreement).

If your franchise agreement contains a renewal provision you may be able to renew or extend the term of your franchise agreement. However, not all franchise agreements will contain a renewal provision.

 

THe Term of Franchise Agreement should coincide with term of Lease

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.

Your lease expires before your franchise agreement expires

Your franchise agreement should contain provisions about what will happen if your lease is terminated or expires before your franchise agreement expires. You should check these provisions carefully.

Your franchise agreement expires before your lease expires

In addition, your franchise agreement may contain provisions about what happens if your franchise agreement is terminated or expires before your lease expires. You should also check these provisions carefully as you may be left without a franchise agreement (or the right to operate the franchise business) but still have to comply with your lease.

 

Renewal

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.

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 unlikey that you will be able to renew your franchise agreement (without the consent of the franchisor).

Diarise important dates

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

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.

 

Holding Over

A franchise agreement may contain a holding over provision.

A holding over provision allows the franchisee 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.

 

Franchisor to Notify

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).
Stephen

Written by Stephen