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It is essential that you are aware of all of your responsibilities and obligations if you are franchising in New Zealand. There are many different ways of setting up a franchise, as there is no franchise-specific legislation in New Zealand. One of these ways involves using a master franchise agreement. However, as this article will discuss, there are a few things to consider if you have a master franchise agreement and are looking at ending it.

What is a Master Franchise Agreement?

A master franchise agreement is a contract between the franchisor and a franchisee. It allows the franchisee to manage the franchise’s business within a specific location. This means the franchisee can franchise the business to new parties within a particular area. These new parties are called ‘sub-franchisees’. They are then in charge of managing those franchises and are responsible for training and supporting them.

Termination

A time may come where the master franchise agreement has to be terminated. This can be because either the franchise has:

  • come to the end of its term; or
  • defaulted.

The biggest issue that crops up through the termination of a master franchise agreement is what happens to the sub-franchisees contracts. Usually, the original franchisor can take over the contracts, but this is not always the case. This is because there may be issues around royalty rates. Additionally, the franchisor may not have the resources to support the sub-franchisees.

First Right Clause

The franchisor might decide to appoint a new franchisee as the master franchisee, but there may not be anyone willing to do this job. Therefore it is essential that a franchisor has robust clauses in place that cater for this scenario. The franchisor should add a clause in the agreement that states that the franchisor has the first right to enter into a contract with the sub-franchisees to keep the franchises going. This is important as there could be a case where a franchisee, who you do not think is capable of being a master franchisee, enters into a contract with the sub-franchisees. This is why it is vital that you have a plan as to who will take over the contracts of the sub-franchisees when a master franchise agreement ends.

Intellectual Property

Another issue that should be considered when ending a master franchise agreement is how to protect the franchise’s intellectual property. The master franchise agreement needs to have provisions that relate to the protection of intellectual property. You should remove the master franchisee from all registers that relate to trademarks or business names. There should also be a provision that requires the master franchisee to return any physical and intellectual property to the franchisor.

Restraint of Trade Clause

Another issue that you may want to consider is whether your master franchise agreement has a restraint of trade clause. A restraint of trade clause bans a franchisee from owning a business in either the exact location or industry. They are used to stop franchisees from learning the business processes of a franchise and applying them to their own business. If you are a franchisee with a master franchise agreement ending, you should carefully look over your agreement to make sure there is no restraint of trade clause if you are looking at starting your own business.

The length of a restraint of trade clause differs per agreement but the standard is usually two years.

Key Takeaways

Franchising is a great way to expand your business, because you are able to grow without expending your own labour or capital. One of the most popular ways to structure a franchise is through a master franchise agreement. It means that you can spend less time focusing on supporting franchisees and more time on the franchise as a whole. However, you must always be prepared for the possibility of a master franchise coming to an end.

There a few things that you should consider when your franchise comes to an end. You must think about how the sub-franchisees, who were party to the master franchise agreement, are going to be supported. This is because they will be contractless unless the franchisor enters into a contract with them or another franchisee takes on the role of master franchisee. You should also think about how your intellectual property will be protected and if there is a restraint of trade clause in the agreement. If you need any legal assistance with franchising, contact LegalVision’s experienced franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Do I have to have a master franchisee?

No, you can contract directly to all your franchisees. This means you will have the responsibility of supporting and training them.

Is there any other way a master franchise agreement can end?

The master franchise agreement could be terminated because a party has breached one of the terms of the agreement.

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