Part two of our Aspects of a Franchise Agreement discussed the obligations of the franchisee. A breach of any of those obligations will be a breach of the agreement. In some situations, the breach may also be grounds for termination of the franchise agreement.

Breach of the franchise agreement

In the event that the franchisee is in breach of the franchise agreement, the franchisor will issue a notice of breach of franchise agreement. The agreement will set out what the notice should contain, such as the reference to the clause that the franchisee has breached and the time frame to remedy the breach. If permitted under the franchise agreement, the notice may also refer to a clause in the franchise agreement that allows for the franchisor to recover its legal costs due to the franchisee’s default. All notices must include evidence of the breach (eg emails, photos or a statement of arrears). It should also state that failure to comply with the notice may result in the termination of the agreement. The notice must be correctly served on the franchisee and guarantors.

A notice of breach starts the process of terminating the franchise agreement. In most cases, the franchisee will comply with the notice, remedy the breach and the parties will move on.

Termination of the franchise agreement

If a franchisee does not comply with the notice of breach, the franchisor will need to assess whether that would be grounds for terminating the franchise agreement. Termination of a franchise agreement is not undertaken lightly as the franchisor is taking away the franchisee’s business. However, the franchisor cannot risk brand damage or other franchisees questioning why the franchisee is being permitted to act without any punishment.

Any ground for termination of franchise agreement must be contained in the agreement. Ideally the franchisor should talk to the franchisee and advise that it has grounds to terminate the agreement, but is willing to negotiate a termination and handover of the business. This is a ‘friendly’ way in the sense that the franchisee agrees that it cannot comply with its obligations under the agreement and the parties can negotiate the terms of the termination. However, the franchisee may not agree to this. Accordingly, the franchisor should issue the notice of termination of franchise agreement, and wait until the end of the working day to take over the premises and change the locks. As a part of this, the franchisor should also talk to the landlord (if it does not hold the lease) and explain the background to the termination.

Termination of the agreement does not forgive any debts owed by the franchisee and guarantor and they must still pay any amounts owing to the franchisor up and including the day that the agreement was terminated. Furthermore, any termination of the agreement is without prejudice to the franchisor’s rights in the agreement and at law. Finally, the franchisee will be liable for the franchisors costs in issuing the notice of termination due to its default.  

In conclusion, if you are a franchisee who has been issued with a notice of breach of franchise agreement, you should review your rights under the agreement and seek urgent legal advice.

This article was written by Khushbu Sundarji and Stewart Germann.