Rights of renewal in franchise agreements allow franchisees to renew their contracts after the expiry of a term, although not all contracts have this provision. The franchisee cannot be forced to renew the agreement just because the contract contains a right of renewal; they’re supposed to do it voluntarily.
It’s advisable to hire a franchise dispute lawyer in the USA from the onset for legal counsel on issues that may jeopardize your interests. For instance, a franchisor may refuse to sign a new contract if the franchise was performing well and they want to enjoy the benefits alone. But how are the parties in a franchise affected by a right of renewal in a franchise agreement?
The Legal Position
Disclosure documents must reveal whether prospective buyers can or cannot renew the contract after the expiry of a franchise term. The following statement should be included in the agreement if the franchisor has no intention of renewing the franchise agreement, and it should be boldly written in a font size of 12.
“The franchisee has no option of renewing the franchise agreement and the franchisor may, or may not, extend the contract at the end of an active franchise term. The franchisee will have no authority to operate the franchised business if the contract is not extended”.
The franchisee must be notified if the contract is to be extended:
- 6 months before the expiry of an active franchise term, if the term is more than 6 months; or
- 1 month before the expiry of an active franchise term, if the term is 6 months or less.
Do I have to renew the franchise agreement as a Franchisor?
This will be determined by the provisions of franchise law and the franchise agreement–meaning each case is unique. However, the franchisee must be notified either 6 months before the expiry of a contract if the franchise term is longer than 6 months or 1 month before the end of the contract if the franchise term is less than6 months.
The franchisee might not renew the contract if the franchisor doesn’t offer them to sign a new contract. A franchisor can decline the offer to renew the contract due to the following reasons among others:
- Breaching the franchise agreement;
- Paying the renewal fee;
- Upgrading the outlook of the business;
- Failure to comply with the conditions of a new agreement
Consequences of Failing to Renew the Franchise Agreement
Franchisees may or may not renew the franchise agreement and if they are to renew their contracts, they should first evaluate and consider whether the terms of the new contract (pre-existing conditions) are reasonable before committing themselves. For instance, the franchisee might be forced to spend exorbitantly renovating the premises, which could be unreasonable in such a scenario. The consequences of failing to renew the contract can include:
A franchisee will lose the goodwill they’ve worked so hard to build if they fail to renew their contract after the expiry of a franchise term–the remedy, in this case, would be to sell their (franchisees) interest to third parties, hoping the franchisor will be open to such a move.
A leasing term and a franchise term can have different expiry dates–meaning the franchisee’s premise may continue attracting rent that they are obligated to keep paying if the franchise term expires before the lease. If the franchisee wants to run another business on the same premise after the expiry of their contract, they should review the non-competition clause of the existing franchise agreement.
Non-Competition or Restraint Clauses
A non-competitive clause is a binding agreement contained in the franchise contract prohibiting the franchisee to operate a business that directly or indirectly competes with the franchisor’s business. The features of a non-competitive clause can include:
- Scope of restrictionRestrictions are limited to the activities or the specialization of the franchisor. For example, if the franchised business is a restaurant, the franchisee cannot open a restaurant after the expiry of the contract.
- Geographical coverageGeographical coverage or market size shouldn’t be unreasonably larger than necessary to protect the interests of both parties–franchisor and franchisee.
- Duration of restraintA reasonable duration of restraint shouldn’t be more than one year because the franchisee would have gotten customers within this duration if they had not worked with the franchisor, and had started a business similar to the franchised business.
How can a Franchise Dispute Lawyer help?
Disputes related to franchise contract termination and renewal can be complex and require the expertise of a franchise dispute attorney to resolve. The standard advice is to involve a lawyer when the franchise contract is being drafted to ensure all parties are satisfied. If you’re already in the mess, you can seek legal counsel.
A right to a renewal grants franchisees the right to extend their contract although they can decide not to. However, failing to renew the contract has consequences, as we’ve discussed in this article.
