Exit A Franchise

There are many reasons why you may want to get out of a franchise agreement early

You may want to sell your franchise business or you may want or need to stop operating your franchise business. 

 

Exit A Franchise Services

Your right to exit your franchise agreement, sell your franchise business or pass your franchise business on to a beneficiary will depend on the terms of your franchise agreement and the Franchising Code of Conduct.

 

Cooling Off

Under the terms of the Franchising Code of Conduct and on the basis that you are not renewing or extending an existing franchise agreement, you can end (or terminate) your franchise agreement:

  • within 14 days of signing (or entering into) your franchise agreement; or
  • within 14 days of making a payment under your franchise agreement

whichever is earlier.

This is known as the cooling off right.

In addition, where you are leasing the premises from the franchisor or an associate of the franchisor, or you are occupying the premises under another right and the lease is not yet in force, from 1 July 2021 you can terminate the franchise agreement 14 days after receiving the terms of the proposed lease or right to occupy.

There is a further 14 day cooling off period that applies if the final terms of the lease or right to occupy are not substantially identical to the proposed terms.

The new cooling off lease provisions do not apply to:

  • the renewal of existing franchise agreements;
  • the extension of the term or scope of an existing franchise agreement; or
  • the transfer of an existing franchise agreement where the new franchisee does not have to enter into a new franchise agreement. Transfers are dealt with under a separate provision. 

If you are taking the transfer of an existing franchise agreement, the cooling off period will expire at the earlier of:

  • the period 14 days starting the day after you become the franchisee for the purposes of the franchise agreement;
  • the period ending on the day you take possession and control of the franchised business. 

If the cooling off right is exercised within the time frames set out above, the franchise agreement will revert to the previous franchisee and the previous franchisee will be reinstated as the franchisee.

 

Selling the Franchise

 

The sale of your franchised business will be determined by the provisions of your franchise agreement. Most franchise agreements contain provisions which allow you to sell your franchise business back to the franchisor or to a third party who has been approved by the franchisor.

The franchisor cannot unreasonably withhold consent for you to transfer your franchise business to a third party.

The franchisor will normally have the first option to purchase your franchise business either at market value or on the terms and conditions set out in your franchise agreement.

If you sell your franchise business it is likely that you will be required to pay a transfer fee to the franchisor. You should be aware of the amount of the transfer fee before you set the sale price for your franchise business.

If you sell your franchise business you will also normally be subject to restrictions such as confidentiality and restraint of trade. These restrictions are designed to protect the franchisor's goodwill. It is important that you understand these restrictions (and whether they are enforceable) before you exit the franchise agreement.

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Franchisor Breach

Some franchise agreements may allow a franchisee to terminate the franchise agreement in certain circumstances. 

However it is rare to see a franchise agreement which allows the franchisee to exit the franchise agreement without paying an exit fee or other money to the franchisor.

If the franchisor has breached an essential or fundamental obligation under the franchise agreement, the franchisee may still be able to terminate the franchise agreement at general law.

The general legal principle is that breaches of terms of a contract that are essential terms (that is, terms that go to the heart of the contract), give the innocent party a right to terminate the contract.

Not all breaches of a contract are breaches of essential or fundamental terms.

In the case of Little Images Pty Ltd v Fresh View Venture & Ors [2011] QSC 402 the franchisee purportedly terminated the franchise agreement on the basis of the franchisor's breaches of the franchise agreement.

In that case the Court held that the franchisee was not entitled to terminate because the "magnitude of the breaches were not serious or deliberate". 

 

Negotiated Termination

You may be able to negotiate an exit of your franchise agreement with the franchisor.

Under the new clause 26B of the Franchising Code, you are able to propose the early termination of the franchise agreement and the terms on which the early termination will occur.

The franchisor must then provide you with a written response within 28 days.

If the franchisor refuses your proposal, the franchisor's written response must include the reasons why the franchisor is refusing the proposal.

The good faith provisions set out in the Franchising Code apply to any negotiations about the early termination of the franchise agreement.

If you negotiate an exit of your franchise agreement you will generally be required to enter into a surrender deed (surrendering your rights under the franchise agreement).

A surrender deed will usually contain a release of the franchisor from its obligations under the franchise agreement and from any claims that you may have against the franchisor.

It is likely that you will still be subject to restrictions such as confidentiality and restraint of trade. It is important that you understand these restrictions.

 

 

The information contained on this page is subject to our Terms and Conditions.

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