How to exit a franchise agreement

There are several ways a franchise relationship may end. Although these are sometimes collectively described as "terminating" a franchise, legally there is an important distinction between a franchise agreement expiring at the end of its term, being transferred as part of a sale, being surrendered by agreement and being terminated before expiry.

For a more detailed look at termination see our article Understanding Franchise Agreement Termination.

Franchise Exit Options

Let the Franchise Agreement Expire

One way to exit a franchise is to allow your Franchise Agreement to reach the end of its term without renewing or entering into a new agreement.

Before relying on expiry as your exit strategy, check the expiry date (the expiry date will generally be set out in the schedule to your franchise agreement) and any provisions dealing with renewal, notice requirements or holding over.

You should also consider what will happen when the agreement ends, including any obligations to debrand the business, return confidential information or franchise materials, pay outstanding amounts and comply with post-term restraints.

If you lease the premises, it is also important to check whether the term of your lease aligns with the Franchise Agreement, as the expiry of the franchise does not necessarily bring your lease obligations to an end.

If the franchisor does not wish to take over the premises, the lease may require you to "make good". That is, to remove the fit out and leave the premises as it was. This can be an expensive process and should be taken into account in any decision to allow the franchise agreement to expire. 

If the franchise agreement expires it is unlikely that you will receive an amount for the value of the business. 

Sell the Franchise Business

Selling your franchise business is often an attractive way to exit a franchise, particularly where there is value in the business that you want to realise rather than simply allowing the Franchise Agreement to end.

However, selling a franchise is not the same as selling an independent business. Your Franchise Agreement will usually regulate the sale process, including whether the franchisor has a right of first refusal, the requirements for obtaining consent to the proposed purchaser and any transfer fees, training costs or other conditions that must be satisfied. 

It is important to understand the requirements for a sale before putting the business on the market. For more information, see our complete guide to selling a franchise business.

Negotiate an Early Exit

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

Under the section 54 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.

Importantly, you should be aware that a franchisor does not have to agree to the early termination of the franchise agreement.

Exercise Cooling Off Rights

Section 54 of the Franchising Code provides that on the basis that you have not opted out of your cooling off rights (which you can do in limited circumstances), you can end (or terminate) your franchise agreement within 14 days of signing (or entering into) your franchise agreement.

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, you can terminate the franchise agreement 14 days after receiving the terms of the proposed lease or right to occupy.

Terminate the Franchise

While some franchise agreements may allow a franchisee to terminate the franchise agreement in certain circumstances, 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.

The general position is that a franchise agreement (and the terms of the Franchising Code), will allow a franchisor to terminate a franchise agreement if the franchisee has breached the provisions of the franchise agreement and the franchisor has followed the legal process, however a franchise agreement is unlikely to allow a franchisee to terminate a franchise agreement for franchisor breach.

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.

However, a breach by the franchisor does not automatically give you a right to terminate your franchise agreement and 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".

What happens after you exit your franchise?

Will a restraint of trade apply after you exit?

Exiting your franchise does not necessarily mean that all of your obligations to the franchisor come to an end. Most franchise agreements contain restraint of trade provisions that seek to restrict what a franchisee can do after the franchise relationship ends.

A restraint may prevent you from operating, working in, assisting or having an interest in a competing business for a specified period and within a particular geographic area. Franchise agreements often contain multiple overlapping restraint periods and areas, sometimes referred to as cascading restraints.

Whether a restraint is enforceable will depend on its terms and the circumstances. A restraint that appears in your Franchise Agreement is not automatically enforceable simply because you agreed to it. Generally, a restraint must protect a legitimate interest of the franchisor and go no further than is reasonably necessary to protect that interest. The position can also differ depending on the State or Territory and the circumstances in which the franchise relationship ends.

Check the restraint before deciding how to exit

The restraint should be considered before, rather than after, you exit the franchise. It may affect whether you can continue working in the same industry, establish another business, work for a competitor or deal with customers after you leave.

The way you exit can also be important. If you are selling your franchise business, the sale documents may contain additional restraints. If you are negotiating an early exit, the scope of the restraint may be one of the matters that can be negotiated as part of the surrender and release arrangements.

If you are planning to leave a franchise and want to continue working in the same industry, obtaining advice about the restraint before committing to an exit strategy can help you understand what you may and may not be able to do after the franchise ends.

How our Franchise Lawyers Can Help