What Are Your Options if You Want to Terminate a Franchise Agreement?
Franchising is a hugely popular business model that provides plenty of potential benefits to both franchisors and franchisees. As of 2022, the UK plays host to over 44,000 business units, with the sector generating around £15.1 billion in revenue each year.
Running a franchise can be a fantastic opportunity to generate profit for franchisees, with around 97% reporting a profit for more than 20 consecutive years. Money aside, franchise agreements also present an opportunity to begin running a proven business model in a competitive commercial environment and to receive ongoing support from an established brand.
Despite this, it is critically important that the terms and legalities are all clearly established in a franchise agreement. In the UK there are no specific laws that pertain to franchises, and so, terminating a franchise agreement can sometimes be difficult.
Regardless, it is not uncommon for both franchisors and franchisees to need to terminate franchise agreements and there are many reasons that either party may require this option. For example, some of the common reasons for dispute between franchisors and franchisees that could lead to potential termination include:
- There is a lack of support being provided by the franchisor
- The franchisee is not making the profit they were promised
- The franchisee is not performing their expected duties
- One party believes the other is not following the terms of the franchise agreement
If any of these issues apply, specialist legal support is crucial. Accessing early guidance gives you the best chance of a smooth resolution, allowing you to safeguard your interests and finances.
In this article, we explore the different options you have, if you would like to terminate a franchise agreement.
What choices do you have if you wish to end a franchise agreement?
Whether you are a franchisor or a franchisee, if you would like to terminate a franchise agreement, you have various options at your disposal. These include:
Breach of contract
There may arise situations where a franchisee has violated the terms and conditions of the franchise agreement, for example, they have not met the required standards of quality, have failed to operate according to given guidelines, or have not paid royalties. In situations such as these, the franchisor may have the right to terminate the franchise agreement, due to breach of contract.
Equally, a franchisee might have the option to terminate their agreement where the franchisor has committed a breach of contract. Situations that might amount to this include where a franchisor has failed to provide training and support, incidents of misrepresentation, or making unreasonable or unauthorised changes to the franchise.
Regardless, where a breach has occurred, the party who has raised the issue is often required to provide the party at fault with a chance to remedy the breach. The relevant party must state why they are intending to terminate the agreement, and the steps that the other individual must take to resolve the breach.
However, where contract breaches are severe, for example, those involving illegal activity, the party at fault is unlikely to have the opportunity to remedy the situation, and immediate termination is more likely.
The majority of franchise agreements are valid as a contract for a specified duration of time, for example, 5 or 10 years. If either party wishes to terminate the agreement, and they are close to the end date, they might simply choose not to renew the agreement.
Of course, this option is only viable where the franchise agreement is soon to end, or where parties are in a position to wait a while before the contract is terminated.
Mutually agreed termination
Where both the franchisor and the franchisee wish to exit the franchise, they can choose to mutually terminate the agreement prior to the previously agreed end date.
Circumstances that might amount to this conclusion include:
- Where a business is unprofitable or struggling and both parties feel that termination is best to protect their interests.
- Where there has been a change in either party’s circumstances, for example personal matters such as family or health, and the other party is willing to except termination of the agreement.
Provisions for termination
Most franchise agreements include termination for cause provisions, these are usually triggered where illegal actions such as fraud have been committed, or other actions that might cause damage to a company’s reputation.
The majority of franchise agreements include a termination clause which details the circumstances where either the franchisee or the franchisor would be legally permitted to end the agreement.
The termination clause is likely to outline several potential reasons for termination, for example, where the franchisee has not met the required standards of performance, where the franchisor’s policies have been violated, or, if the franchisor goes bankrupt.
What is the process for terminating a franchise agreement?
The specific process will vary according to the situation, however, generally speaking, the franchisor will need to follow these steps:
- Agreement review: The franchisor and or franchisee should review the franchise agreement with the support of an expert solicitor, ensuring that they have a full understanding of the termination grounds and processes.
- Provide written notice: Where the franchisee or franchisor is in breach of the agreement, the relevant party must provide a written notice to the other, detailing the violations in question.
- Timeframe for correction: Some franchise agreements offer the party at fault with the opportunity to correct their violations, providing a deadline by which they will need to do this.
- Negotiation phases: In certain situations, there may be negotiations between the franchisor and the franchisee, allowing them to resolve the matters without termination. Of course, not all breaches will be appropriate for negotiation, and some will result in immediate termination, for instance, violations such as illegal activities.
- Termination notice: Where negotiation cannot resolve matters, or where matters are serious enough for immediate termination, the franchisor or franchisee must provide a termination notice, the notice should detail the reasons for ending the franchise, and the end date.
How Longmores can help with terminating franchise agreements
At Longmores, our commercial team have much experience providing expert advice regarding franchise agreements, including terminating a franchise agreement.
To access specialist legal support today please contact our dispute resolution solicitors. Our team are happy to answer any questions you have regarding franchise agreements.
Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.