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On what grounds can a franchise agreement be terminated?

On Behalf of | Jun 27, 2023 | Franchise Agreements

The relationship between a franchisor and a franchisee is, in many ways, similar to a marriage. It is meant to be founded on honesty, trust, and accountability. And just like marriage, it is not uncommon for a franchisor and a franchisee to have their differences.

If these differences strain the relationship beyond repair, one of the options one or both parties might consider is terminating the franchise agreement.

A franchise agreement, like any contract, is the heart and soul of a franchise relationship. This agreement stipulates the parties’ terms of engagement. Specifically, it details each party’s rights and obligations as well as how and when the contract may be terminated. That said, there are a few primary instances when a franchisor or franchisee may terminate a franchise agreement.

Franchisee’s failure to pay the franchise fee

Part of owning a franchise business involves the franchisee paying applicable franchise fees per the terms of the agreement. Depending on the contract, the franchise fee may feature two components – the initial fee and the ongoing royalty fee. Failure to pay the royalty fee on time can prompt a franchisor to terminate the franchise relationship.

Franchisee’s Insolvency

Sometimes, things don’t quite go as planned. When a franchisee is weathering financial problems, they may lack the funds to pay their landlord, acquire inventory from the franchisor or pay inventory fees. When a franchisee is no longer able to run the operation for whatever reason, both parties may agree to terminate the relationship.

Irreparable breach of the franchise agreement

When a breach of the franchise agreement is particularly severe, , such that a franchisor’s brand image is endangered, a franchisor may have the right to immediately terminate the franchisee. For instance, if a franchisee engages in fraud, lewd activities, employee abuse or other crimes of moral turpitude, a franchisor may have grounds to terminate the franchise agreement.

Most franchise agreements only allow a franchisee to terminate the agreement if their franchisor materially (or irreparably) breaches the contract. Unfortunately, many franchise agreements that we review obligate the franchisor to do very little, so it is often difficult for franchisees to establish that a breach of the agreement has occurred. Nonetheless, if the franchisor neglects or abandons its franchise system (e.g., cutting off operational support, ceasing sales of new units, and failing to safeguard its trademarks), franchisees likely have grounds for termination.

Safeguarding your interests

Contrary to popular belief, franchise relationships are almost never a walk in the park. Seeking legal guidance and learning more about Minnesota franchise laws can help franchisees safeguard their rights and interests in a franchise termination dispute.

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.