How to Navigate a Franchise Renewal Agreement

Franchise renewals have many things to consider. For one, the market might be drastically different then when the initial franchise agreement was signed. Neither the franchisee nor the franchisor should enter into the renewal blindly. Both parties should plan accordingly so the negotiations go smoothly.

Renewal Right

There are multiple franchise renewal options that can potentially be built into a franchise agreement. Automatic, unconditional or conditional are three of the main types of renewal franchises offer. The type of renewal offered established the various parameters of all the renewal terms and which contract terms are negotiable and to what degree they can be negotiated.

Compliance & Conditions

In order to renew your franchising agreement, you’ll need to be in compliance with all the terms of your original franchise agreement. You’ll likely be in compliance with these already, but if you want to renew your agreement, you’ll need to make extra sure you are complying with all your terms.

Most renewal agreements will also have specific conditions or obligations that will need to be met in order for a renewal to be granted. If they are “conditions” that need to be met, then as a franchisee, you’ll have some discretion as to meeting them. When the agreement has been renewed, the conditions are tacitly considered to have been met.

If they are classified as “obligations,” on the other hand, then a renewal simply confirms your duty to fulfill the obligations and you will still be responsible for meeting them.

An example of conditions or obligations is that a franchisor might require you to renovate your franchise before renewing an agreement to adhere to the brand’s latest style.

Terms of Expiry

If an agreement isn’t renewed, the franchisor might have specific stipulations built into the original agreement, such as having the right to purchase the assets of the franchise and possibly how those assets are valued. Pay close attention to these when you sign your initial agreement so you know what to expect if you opt not to renew your franchising agreement.

Statutory Obligations

Franchisors have statutory obligations to follow. In Ontario, for example, franchisors must provide a new franchise disclosure document before the renewal of the franchise agreement. Often, franchisors will use renewal periods to introduce new drafts of the disclosure document if anything has changed from when the initial agreement was signed. The franchisor should make you aware of any changes the new document includes.

The franchisor is also obliged to follow the statutory duty of fair dealing, which also incorporates the common law duty of good faith. This statutory duty requires franchisors to:

  • exercise their powers under the franchise agreement in good faith and with regard to the interests of the franchisee;
  • observe standards of honesty, fairness, and reasonableness;
  • avoid causing significant harm to the franchisee,
  • exercise discretion reasonably and with proper motive.

The renewal process is inevitable in any franchise agreement. Both parties have an obligation to treat each other fairly and openly. When it is getting close to your time to renew your agreement, make sure you know all your rights and duties, as well as the rights and duties of the franchisor so your renewal goes smoothly.  For first-time franchisees, sign up for a free FranNet franchise search and consultation for help finding the right franchise opportunity for you.

Jan 17, 2018