How to Get Out of a Franchise Agreement in the UK
How to Get Out of a Franchise Agreement in the UK
Franchise agreements can provide a wide range of benefits for both franchisees and franchisors. That being said, there may come a time where the agreement is no longer fit for purpose, leading to one or both parties exploring their options for the termination of the franchise agreement.
Unlike in other countries, there are no specific franchising laws in the UK. The relationship is governed by the contractual terms which are set out in the franchise agreement. This means that removing yourself from a franchise agreement can be somewhat complex – though it is important to note that it is not necessarily impossible.
Here, we discuss the conditions under which terminating a franchise agreement may be possible for both franchisees and franchisors, as well as additional methods for ending a franchise agreement where both parties are in agreement.
What is a franchise agreement?
To summarise, a franchise agreement is a legally binding document signed by a franchisor and franchisee, setting out the legal terms which underpin the relationship between both parties.
Franchise agreements are essentially in place to make sure that the ownership and control of the business brand will remain in the control of the franchisor, with the franchisee only being entitled to ‘rent’ out the business for the duration of the agreement.
What should a franchise agreement include?
Franchise agreements typically provide wide powers to the franchisor. This is done to protect against the integrity of a brand being damaged by a ‘rogue’ franchisee.
The key provisions of a franchise agreement will often be:
- Rights granted to the franchisee – This could include any options to use intellectual property related to the business.
- Fees – There are usually fees required to buy into a franchise, as well as other management fees which are payable to the franchisor.
- Term – The term of the franchise agreement is usually between 5-10 years and there should be a mechanism which allows for an extension in certain scenarios.
- Obligations – This will usually provide a guide on how the franchisee should operate the franchised business in accordance with applicable rules
- Restrictions – Restrictions which apply during the term of the franchise agreement and after its termination or expiry.
- Intellectual property rights – The steps that need to be taken to protect the IP rights in the franchise, while also detailing how the franchisee can exploit these same rights for the benefit of the business.
- Insurance – Suitable insurance will be in place to cover various liabilities.
- Termination – Very rarely will there be a specific termination clause in a franchise agreement enabling the franchisee to terminate early, but there may be legal rights which can be exercised by a disgruntled franchisee.
- Exit – Franchisees may be able to sell their interest in a franchise on to the franchisor or separate third party, providing a clear exit route.
Under what conditions can you terminate a franchise agreement?
Terminating a franchise agreement is a major step and not one which can be done easily. However, there may be certain conditions under which you can end an agreement, both as a franchisee and a franchisor.
As a franchisee
Clause to terminate
The majority of franchise agreements do not explicitly allow for early termination. However, an agreement may include a clause to terminate, which would be contingent on a certain event occurring. The COVID lockdowns of 2020 and 2021 were examples of the sort of events that could trigger a termination clause.
Terminating a franchise agreement can be an area of considerable legal risk, so it is important that this is carefully considered, with the terms of the agreement followed correctly.
Breaches of terms by franchisor
Franchisors are equally responsible for adhering to the terms of an agreement. However, if they breach the terms, there may not be an automatic right to termination for the franchisee.
However, a fundamental breach by a franchisor or actions which derogate (or take away) from the franchisee’s rights may give rise to a potential termination.
As a franchisor
Breach of terms by franchisee
While a franchisor is unlikely to have the power to terminate an agreement for every breach that takes place, there will be grounds on which they can take action.
Whether a franchisee is in breach of the terms of a franchise agreement will depend heavily on the specific wording and the surrounding circumstances of the alleged breach.
An ethical franchisor should provide a franchisee with an opportunity to rectify the breach. Usually, the franchisor must propose why they intend to terminate the breach, the actions that need to be taken to rectify the breach and provide a reasonable timeframe for doing so. That timeframe is usually specified in the franchise agreement.
So long as the above steps are taken, a franchisor can issue a termination notice following this ‘reasonable timeframe’. If the breach is rectified, a termination notice cannot be issued those grounds.
How else can you break a franchise agreement?
There may be other methods for terminating a franchise agreement, particularly where both parties are in agreement over how to proceed.
Terminating a franchise agreement may not always be a combative matter. If both parties are in agreement that the agreement should be terminated, then a request can be initiated and accepted by either party.
An exit payment can be negotiated and a franchisor can also request to buy back the business.
Franchisees may be able to sell their interests in the franchise to the franchisor or a third party which has been approved by the franchisor.
A franchise agreement may require a franchisee to first offer the franchise for sale to the franchisor. If the franchisor declines and third-party purchaser is approved by the franchisor, the franchisee can sell the franchise to the purchaser.
Can you provide notice to terminate and leave a franchise early?
Under normal circumstances, you cannot give notice to terminate and leave a franchise early. Most franchise agreements are for a fixed term (often a minimum of five years), with both parties being committed for this length of time.
If a franchisee simply ceases trading and attempts to leave the franchise early, the franchisor could bring forward a claim for loss of profits on the fees that would otherwise have been payable.
What is a franchise non-renewal?
Franchise non-renewal is straightforward. If, following the end of the fixed term of the franchise agreement, a franchisee does not want to renew the agreement they do not have to.
However, it is important to keep in mind that there may be certain provisions that a franchisee is bound to, even after the expiration date of the franchise agreement (such as confidentiality and non-compete restrictions).
How our solicitors can support with franchise agreements
It is essential that, if you are entering into a franchise agreement, you have the right terms in place that ensure you are protected in the event that you wish to terminate the contract or you need to make certain changes to an agreement which is already in effect.
At IBB Owen White, we provide a comprehensive franchise agreement review service. This fixed fee service provides you with a detailed written report to guide you through the implications of the franchise agreement at hand, ensuring you understand exactly what you will be committing to.
The report will also outline the principal terms and highlight any onerous provisions that you should be wary of. Following this, we can answer any questions you may have during a telephone consultation.
We have industry-leading experience in acting for around 100 franchisor brands, and having been affiliate members of the British Franchise Association since 1977.
In addition to this service, we also provide general franchising support, acting on a variety of associated matters.