Despite the countless disruptions and hardships caused by the pandemic, many franchise systems have launched or continued to thrive under these difficult conditions. With that being said, unfortunately, many businesses (including franchises) continue to be significantly impacted by the ongoing impacts of lockdowns, supply chain issues and staffing shortages. This has resulted in some franchised businesses no longer being viable, forcing parties to walk away earlier than expected.
Typically, franchise agreements do not include a right for franchisees to terminate the franchise agreement during the term (outside the cooling-off period). However, as a result of the recent changes to the Franchising Code of Conduct , it is now within the rights of a franchisee to propose to terminate their Franchise Agreement.
Changes have also been made in respect to time frames relating to cooling off, and a franchisor’s right to terminate under special circumstances. Our BlueRock franchise lawyers have compiled a summary of these changes below.
Extension of Franchise Cooling-Off Period
For new franchisees entering into an agreement, the cooling-off period has been extended from 7 to 14 days.
This cooling-off period also applies when a franchise agreement is transferred. Under these circumstances, the new franchisee must give written notice to the old franchisee and the franchisor within:
- The period of 14 days from the day it becomes the franchisee (for the purpose of the agreement)
OR
- The period ending on the day it takes possession and control of the business, whichever comes first.
What Other Factors Impact the Franchise Cooling-Off Period?
The cooling-off period is also affected if the franchisor has proposed to lease or sublease premises or grant an occupancy right to the new franchisee for a premises (rather than have the franchisee enter into a lease directly with the landlord). In these circumstances, the cooling-off period starts from the date the new franchisee receives the relevant lease/occupancy documents in their final form – regardless of when the franchisee entered into the franchise agreement.
Franchisee Proposal to Terminate a Franchise Agreement
Under the amendments to The Franchising Code of Conduct, franchisees can now make a written request to the franchisor to terminate the franchise agreement. In making a request for early termination, franchisees must provide reasons for its proposal, and the franchisor is then required to provide a substantive written response to the franchisee (within 28 days) as to whether it accepts or rejects the proposal.
It’s important to note that this amendment does not give franchisees a right to terminate on demand, but it is a mechanism to facilitate discussions with the franchisor.
Termination of a Franchise Agreement on Particular Grounds
Despite being previously permitted by The Code, new amendments no longer allow for franchisors to terminate immediately in special circumstances. The franchisor is now required to provide 7 days’ written notice to the franchisee of the termination in those circumstances. The grounds that permit the franchisor to do so have remained unchanged.
This change only applies to franchise agreements that were entered into, extended, or renewed on or after 1 July 2021.
Navigating Franchisee Termination Disputes
If the termination notice is disputed by the franchisee within the 7-day notice period, then the franchisor must not terminate the franchise agreement for a period of 28 days after the termination notice was given.
The Code now provides for the rapid appointment of an Alternative Dispute Resolution (ADR) practitioner in such situations, and so, if the parties are unable to promptly resolve the dispute between themselves, the franchisor may refer the matter to an ADR practitioner. Alternatively, both parties may also make a request to the ombudsman to appoint an ADR practitioner.
Other Rights to Terminate a Franchise Agreement
As a result of these changes, franchisors may also choose to rely on other rights to terminate an agreement, such as a Standard Breach. A Standard Breach requires franchisors to allow a reasonable period within which to remedy the breach before relying on it to terminate, which in some scenarios may be less than 7 days.
However, under these circumstances, the rapid appointment of an ADR practitioner is not available – meaning that the parties must attempt to resolve a dispute within 21 days before choosing to engage an ADR practitioner.
Operating a Franchised Business During the Termination Period
If franchisors are concerned that their franchisee’s conduct could be detrimental to the franchise brand, we recommend including a clause in the franchise agreement that permits the franchisor to operate the business during the 7-day notice period, or the 28 days in instances that the termination is subject to a dispute.
Whether you’re looking to terminate your franchise agreement, need support in updating your franchise agreement to comply with the Code of Conduct, or are wanting to add an extra layer of protection to your franchise model, our franchise lawyers and accountants are best placed to help. Get in touch with our franchising experts at BlueRock Law for a free consultation now.
