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Like terminating a business contract or lease agreement, a franchisee is entitled to terminate, or cancel, their franchise agreement. However, you can only invoke this right in specific circumstances. Wrongful termination of a franchise relationship may lead to a dispute with your franchisor. That is why it is crucial that you, as a franchisee, understand the grounds on which you can terminate your franchise agreement. This article will outline what these grounds are.

How to Terminate Your Franchise Agreement During the Cooling-Off Period

To become a member of the Franchise Association of New Zealand (FANZ), franchisors must include a cooling-off period clause in their franchise agreements. 

Such a provision provides you, as a franchisee, with the option to withdraw from your franchise agreement within a seven-day period after having signed the document. After withdrawal, you are also entitled to receive a refund if you paid a deposit when entering into the franchise agreement. However, the franchisor may be able to retain reasonable expense incurred whilst setting up the agreement. 

If you wish to terminate your franchise agreement during this cooling-off period, you must provide your franchisor with a formal written notice. 

How to Terminate Your Franchise Agreement Through Mutual Agreement With Your Franchisor

As you entered into the franchise through an agreement with your franchisor, you may leave the franchise through a contract

This approach to cancellation is dependent on your franchisor. Your franchisor must consent to the termination of the franchise agreement. To obtain their consent, you may have to pay a cancellation fee or aid the franchisor in training an incoming franchisee. This requirement may be contained in a termination clause in your franchise agreement, or determined by your franchisor in negotiations. 

You must clarify all of the conditions for the termination of your franchise agreement with your franchisor before you cancel the agreement. 

Termination Clause

Some franchise agreements may include a termination clause. A termination clause is a term of the agreement that allows either party to cancel the agreement in certain circumstances. These circumstances are entirely dependent on what is agreed to in the contract. However, they could include: 

  • changes in market conditions; or 
  • if the agreement is not viable anymore. 

Another condition that could trigger the termination clause is if the head franchisor sells their business to another party. 

Breach of Franchise Agreement

You are also entitled to terminate your franchise agreement if your franchisor has breached their obligations under the agreement. 

For example, if your franchisor is obliged to provide ongoing training of franchise staff, yet fails to do so, this could justify the cancellation of your franchise agreement. You are also entitled to cancel the franchise agreement if your franchisor wrongfully terminates the agreement. The burden is on you to demonstrate that your franchisor has breached their obligations under the agreement. 

However, other remedies aside from cancellation are available for breach of the franchise agreement. Most franchise agreements contain a dispute resolution clause, which allows for some opportunity to rectify your franchisor’s breach. 

Contract Expiry

Franchise agreements might also contain an expiry date. Once this date has passed, both parties are not bound by any obligation under the contract. If this happens then, the agreement can be terminated. However, the parties will usually negotiate an extension to the franchise agreement before the agreement expires.

Alternatives to Termination of Your Franchise Agreement

There are alternatives to terminating the franchise agreement that still relieves you of your franchisee obligations.

Sale of Franchise

You may consider selling the franchise to another individual. Whether this option is available to you is entirely dependent on the terms of your franchise agreement. It is best practice to look through your agreement and check to see whether a term prevents you from selling the franchise. 

Most franchise agreements will allow you to sell the franchise. However, you may have to:

  • offer the franchise for repurchase to the franchisor before going to someone else;
  • ensure that franchisor approves the incoming franchisee;
  • assist the franchisor in training the incoming franchisee; or
  • pay a fee to sell the franchise. 

If you sell the franchise, the purchaser will usually only be buying it for the remaining period of your franchise agreement. However, your franchisor may allow, or require, any buyer to enter into a new franchise agreement with a full length term. 

Assignment of Franchise

You may also elect to assign the franchise. Through assignment, you transfer all of your rights and obligations under the franchise agreement to another person. This individual will replace you as the franchisee. 

Whether or not you can assign the franchise will depend on the contents of your franchise agreement. Your franchisor will typically provide the rights of assignment in your disclosure document. 

You must read through your agreement and disclosure document before you assign the franchise. If you are prohibited from assigning the franchise, yet do so regardless, you would be in breach of your contract and could be susceptible to a fine or court proceedings. 

Key Takeaways

It is important that the franchisee is aware of how they can terminate the agreement if they need to use this option. There are several ways that a franchisee can terminate an agreement. You can terminate your franchise agreement:

  • by providing your franchisor with a formal, written notice during the cooling-off period;
  • with the consent of your franchisor. You may have to obtain this consent through a cancellation fee;
  • if it is permitted under the termination claause;
  • if your franchisor has breached one or more of their obligations under the franchise agreement; or
  • if the contract expires.

Alternatively, if you do not fall into any of the above categories, you could consider selling or assigning the franchise. However, how you go about doing this, and whether you can at all, will depend on the contents of your franchise agreement. You must thoroughly read through your agreement before assigning or selling the franchise. 

If you are considering terminating your franchise agreement, LegalVision’s franchise lawyers can help. Get in touch with us by calling 0800 005 570 or complete the form on this page.

Frequently Asked Questions

When can a franchisee terminate a franchise agreement?

A franchisee can terminate a franchise agreement during the cooling-off period, through mutual agreement with the franchisor and if the franchisor breaches a term of the agreement.

Can you walk away from a franchise?

You cannot simply walk away from a franchise. You either have to cancel the franchise agreement, sell the franchise or assign your obligations as a franchisee to another individual.

Can a franchisor terminate a franchise agreement?

Like a franchisee, a franchisor may only terminate a franchise agreement if they have grounds on which to do so. A termination clause in your franchise agreement will usually specify the grounds for ending the agreement. 

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