What Franchisees Should Consider When Their Agreement Is Coming Up For Renewal
While franchise agreements vary in how long they last, the great majority in the UK are for five years. Unless a long term of, say, twenty five years is granted because of the very high initial investment required, franchisees should expect a right to renew (if they would like to do so, and provided they have performed properly) their existing franchise agreement. Indeed, on a five-year term franchisees can generally expect at least two “automatic” renewals.
When approaching the end of the term of their franchise agreement, the first thing that franchisees should do is to establish what the renewal process entails. The first step is to be very clear about what their existing franchise agreement says about renewal. Virtually all franchise agreements provide that a franchisee must serve a renewal notice on the franchisor within a specified period prior to the end of their term. Some franchise agreements go even further and make it clear that a failure to do so would result in the franchisee losing the right to renew. You should not rely on the franchisor telling you that you need to renew. If you are a franchisee that has performed well then they are likely to do so, but if not you may find that the franchisor intentionally does not provide a reminder in order to facilitate refusal of a renewal.
You also need to look at the conditions for renewal which could involve substantial costs. For instance, the renewal clause could require you to refurbish your premises which could be expensive. You would then need to establish whether the cost of compliance with the conditions has a negative impact on your decision to renew.
You will undoubtedly have to enter into a new franchise agreement, which is almost always in the franchisor’s then current form of agreement. So, you need to obtain a copy of that new agreement for review or preferably ask your legal advisors to do so on your behalf if the changes are significant. Most ethical franchisors will highlight those provisions which have changed from your existing agreement so as to facilitate the process.
The terms of the renewal agreement may be less attractive than the terms in your existing agreement. However it is worth noting that franchisors do not have a totally free hand to change their franchise agreements because the courts will imply a term which would prevent them from making changes that would make it difficult for you to operate your franchised business profitably. Nevertheless, changes can be made which are not to your advantage. You need to establish whether those changes would make carrying on as a franchisee unattractive to you.
Next, you need to check whether the obligations on termination in your franchise agreement apply also to a non-renewal. Almost certainly that will be the case. This would mean that you would not be able to operate a similar or competing business for a period of time – usually 12 months – if you decided not to renew. Some franchise agreements go even further and, on a franchisee’s failure to renew, the franchisor has the right to take over that franchisee’s business without paying any element for goodwill – in other words, only paying for the value of the business assets which, of course, will be second hand and therefore have a low market value. These provisions can have the effect of locking franchisees into a franchise system because the rights granted to the franchisor on non-renewal could be even less attractive to a franchisee than renewing.
It is likely, if you operate a profitable business, that you would wish to renew because otherwise you would have nothing to sell and the provisions highlighted above would apply. This means that you would be likely, even if you wanted to stop being a franchisee, to renew so as to enable you to find a purchaser for your business.
If you have been successful, your franchisor will want you to renew and so there may be scope for seeking to renegotiate the terms of your renewal franchise agreement. Most franchisors will resist that on the basis that they want to treat all franchisees the same but all franchisees are not the same – some are very successful and others are not. If you are in the former category you could be in a strong position to persuade a franchisor to treat you better than others.
The essential point concerning renewals is that – almost certainly – a renewal rather than a non-renewal is in your best interests. However, you need to be very clear as to the renewal procedure and consider the financial impact on you and your business of complying with the renewal conditions in your franchise agreement.
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John is the senior partner of Hamilton Pratt, Europe’s largest specialist franchise law firm. He is the immediate past Legal Advisor to the British Franchise Association and a past Chair of the International Bar Association’s International Franchise Committee and Director of the American Bar Association’s International Franchising Division.
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