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If you are looking at getting into business, then franchising is a great way to achieve this. It is a popular method as it allows a franchisee to open a business without starting their own brand. It also allows the franchisor to expand their existing business without having to find labour or capital. The franchise agreement is the legal document that will underpin the relationship between the franchisee and the franchisor. It essential that the relevant clauses are included in the document to avoid any misunderstandings between the parties. This article will discuss some of the standard clauses that a franchise agreement might have. These are:

  • grant of rights;
  • obligations; and
  • action on termination. 

Grant of Rights

At the top of a franchise agreement, it will contain the ‘grant of rights’. This is the clause that tells you how long you have the franchise if you comply with all the terms of the franchise agreement. It is important to note that this clause tells you that you are only ‘renting’ the franchise, and once your time is up, you must give up the brand. 

Right of Renewal

However, most franchise agreements will also have a ‘right of renewal’. This clause tells you how you can extend the terms of your franchise agreement and how long for. The right of renewal clause will generally have sub-clauses that must be fulfilled for the franchise to be renewed. Some of these clauses may be:

  • a requirement of notice;
  • a renewal fee;
  • allowing the franchisor to change terms of the agreement, including boundary and fee changes; and
  • requiring the franchisee to renovate their premises.

You must read these clauses carefully before you sign your franchise agreement. If you do not feel comfortable with some of the agreement terms, you should negotiate these with your franchisor. 

Obligations

The franchise agreement will usually contain a set of obligations that the franchisee and the franchisor must follow. However, the obligations on franchisees tend to be more strenuous. Some of the obligations that a franchisee will have to follow include:

Obligation

Definition 

Financial Records

You must keep appropriate financial records, and you may have to share these with your franchisor, depending on your agreement.

Intellectual Property

You will be allowed to use the franchisor’s intellectual property for marketing purposes, but it remains wholly owned by the franchisor.

General Behaviour

You will be required to act in such a way that does not bring the franchise into disrepute. This might include having to get approval from your franchisor for any promotions that could cause harm to the franchise’s reputation.

Discretion

All intellectual property, as well as the franchise manual, will have to be kept confidential.

Approved Suppliers and Distributors

You will more than likely be required to use any distributors or suppliers approved by the franchisor. This may be for quality control purposes or for buying at scale.

Minimum Performance

There will be a minimum financial performance that you will have to attain for your franchise agreement to be valid. If you do not achieve this, then the terms of your franchise agreement may be re-negotiated. 

These are not an exhaustive list of obligations you may face, but they give you an idea of what the franchise agreement requires of franchisees.

Action on Termination

A clause that should be considered appropriately in your franchise agreement is your action on termination. This will outline what needs to happen if the franchise is ever sold or terminated. When it comes time to sell your business, there is a process that is usually followed. Most action on termination clauses will stipulate that you can only sell the business to someone who the franchisor has approved.

The action on termination may also include a restraint on trade. This means that after the business has been sold, the franchisee will not be allowed to either open a business in the same:

  • industry; or
  • area.

You do not want to be tied down to a franchise you do not want to own. Therefore you should always carefully review the terms of the franchise agreement. 

Key Takeaways

Franchise agreements underpin the relationship between a franchisee and a franchisor. They will sometimes be the deciding factor as to whether the relationship will succeed. The clauses discussed above are some of the most common ones you will find in a franchise agreement. However, there will also be many more. As with any business decision, it is a good idea to consult a lawyer to guide you through the franchise process. If you need assistance, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Will my franchise agreement always contain a right of renewal?

No, a right of renewal is not essential as some franchises will only be valid for a fixed term.

Does the franchisor have obligations?

Yes, but these are usually broad and generic. The franchisee obligations are more important as they specify exactly what the franchisee needs to do.

Can the franchisor terminate a franchise agreement?

Yes, if the franchisee breaks one of the terms in the franchise agreement, they can cancel the contract.

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