If you are faced with signing an updated franchise agreement at the time of renewal, you may feel like you are facing an impossible choice. Many franchisors present these documents as “take it or leave it,” suggesting that your right to operate will simply expire if you do not agree to their updated terms. However, in states with strong franchisee protection laws like Minnesota, the power dynamic is not as one-sided as it seems.
The requirement for good cause
In Minnesota, a franchisor cannot simply fail to renew a franchise agreement without “good cause.” Under the Minnesota Franchise Act, good cause is generally limited to instances where a franchisee has failed to substantially comply with the material and reasonable requirements of the agreement.
This means that if your business is in good standing, a franchisor may be legally prohibited from ending the relationship just because you have concerns about new, unfair or inequitable contract terms. Instead of a simple expiration, the law often requires the franchisor to prove that their decision to move on is based on a legitimate failure on your part.
Prohibited practices at renewal
Franchisors often include “standard” clauses in renewal agreements that may actually be unenforceable in certain jurisdictions. You should be especially wary of:
- General releases: Some franchisors try to require you to waive your right to sue them for past disputes as a condition of staying in the system. In Minnesota, requiring a franchisee to waive rights provided by state law is generally prohibited.
- Unreasonable capital expenditures: You can challenge the requirement to pay for major renovations or new equipment just to get a signature on a renewal as an unfair practice.
- Substantial fee increases: Significant hikes in royalties or advertising fees that were not part of your original investment expectation may not always be mandatory under “good faith” standards.
Identifying these red flags early can help you determine if the proposed changes are legally sound. If you are presented with a “then-current” agreement that threatens your profitability, do not assume that the countdown to closure has started.
In many cases, franchisors are required to provide 180 days of notice before a nonrenewal can take effect. This window is designed to give you time to seek legal counsel and determine if the franchisor is meeting their statutory obligations.
Protecting your investment
Before you sign any document that requires you to give up your rights or pay significantly more for the same brand, review the specific protections available in your state. Understanding the MFA and similar “relationship laws” is the first step in ensuring your business remains yours.
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.