For a franchisee, wrongful termination or non-renewal of a franchise agreement poses a serious threat to the business you’ve worked so hard to establish. It can often occur unexpectedly and for seemingly no reason. However, depending on your unique circumstances, you may be protected from termination or non-renewal and able to contest any such situation. Here are some key points regarding franchise agreements and what you should do if you find yourself faced with either of these life-altering events.
Termination vs. non-renewal
Franchise agreement termination and non-renewal are ultimately two different methods of achieving the same result for the franchisor. In a termination, the franchisor cancels the agreement before the end of the contract term, while non-renewal sees the franchisor refusing to renew the agreement at the end of its term. From the franchisee’s perspective, the result is the same: you lose your business.
Why franchisors terminate or choose to not renew
There are many reasons a franchisor may choose to terminate or not renew an agreement with a franchisee. In most cases, this action is done for the franchisor’s own benefit without regard for the future of the franchisee. Here are some of questionable reasons a franchisor will terminate or refuse to renew an agreement:
- To take over a lucrative business or territory for itself
- Consolidate multiple franchise locations in one franchisee’s hands
- Transfer the franchise to a favored successor
All of the above circumstances put the franchisee in a seemingly powerless position, but there may be certain rights that can prevent termination or non-renewal depending on your location, agreement terms, industry, and certain other factors.
Some states have statutes which state that a franchisor cannot terminate an agreement without “good cause” as defined by the statute. For example, a franchisor would need to be able to demonstrate that your franchise is not paying its royalties or advertising fees, or was somehow violating health and safety requirements in order to terminate the agreement. As long as the franchise is performing to a minimum standard, the agreement must remains intact.
The franchisor will sometimes try to achieve the end of the relationship by failing to renew the agreement at the end of its stated term. A smaller number of states also prevent this from happening without “good cause”. In these states, the franchisee may continue to conduct business as long as the franchise is capably performing. “Good cause” could include such things as failure to comply with the material terms of the franchise agreement, failure to meet sales quotas, or failure to achieve quality standards. In states with strong statutory protection against termination or nonrenewal, if you are living up to your agreement, the franchisor has no legal grounds for terminating or refusing to renew your contract.
Know your agreement
Most Franchise Disclosure Documents state that the franchise agreement the franchisee must sign cannot be terminated without “good cause.” However, as franchising has evolved over the years, the franchise agreements now impose so many obligations on franchisees and contain so many “automatic termination” triggers that it cannot really be said that an agreement cannot be terminated except for “good cause.” Franchise agreements are drafted to provide franchisors with the widest possible leeway in franchisee relations. The agreements now make it more likely the franchisee will breach some term of the agreement at some point, thus allowing the franchisor to lawfully terminate the agreement, or not renew it at the end of the term.
As stated above, some states require certain conditions for termination or non-renewal, while others require written notice within a certain time period prior to either action taking place. Other states require an actual opportunity to cure a default prior to termination. You need to know whether you have renewal options/rightm and how to exercise them properly. You also need to make sure you know the dates of your term and your actual substantive renewal rights. A failure to understand this information could result in the end of the term arriving without your noticing and your right to renew being lost. The language of your agreement will ultimately determine your protections and whether or not you are able to prevent termination and keep your business.
What to do in the face of termination or non-renewal
When faced with termination or non-renewal, you must take immediate action against it. From a legal standpoint, it is far easier to retain a franchise before the date of termination or nonrenewal than it is to ask a court to reinstate it once it has been lost. Furthermore, if you do lose your franchise, you’ll also lose the income you’d need to help pay for the impending court case. Most franchise agreements also contain terms that prevent you from working in the same industry for a certain period of time following termination, hampering your ability to continue making a living either during or following the legal battle. Time is of the essence in effectively combating wrongful termination or non-renewal.
Save your franchise today
Dady & Gardner franchise attorneys have enjoyed many successes battling franchisors and suppliers over their attempts to terminate franchisees without good cause. We have helped many franchisees by winning court orders preventing termination and by winning very substantial monetary damages for terminations that were proven to be not justified. Contact us today to schedule a free consultation and prevent your own wrongful termination or non-renewal. Or, if termination has already occurred, to determine whether you may be able to sue for damages based upon a wrongful termination or wrongful nonrenewal.
*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.