Q What options do I have when it comes to ‘getting out’ of a franchise agreement?
Generally speaking, your rights to end your franchise relationship before the predetermined expiry date of your franchise agreement are weaker than those of the franchisor, who will have drafted its standard form agreement to its advantage. For this reason, most termination mechanisms are available to franchisors upon default by a franchisee, not the other way around. In rare occasions, however, a franchise agreement will provide that certain franchisor defaults may give you the right to terminate the relationship early.
If you don’t have termination rights, you may be able to sell or assign the franchise agreement to another party. However, in almost every agreement, your ability to initiate a transfer is subject to the prior consent of the franchisor, which is conditional on meeting the transfer provisions in the franchise agreement.
If you live in a province with a franchise statute, and your franchisor failed to properly comply with applicable disclosure rules, rescission (i.e. the unwinding of the franchise agreement) may be another option. For instance, if a franchisor fails to provide full or timely disclosure, you have 60 days to rescind the agreement; if there is a complete failure to disclose, you can rescind up to two years after entering into the franchise agreement.
Q What constitutes ‘defaulting’ on a franchise agreement?
A default is an act or omission contrary to the terms of a franchise agreement, the occurrence of which may give rise to termination rights. While a typical franchise agreement will spell out specific events of default, some generally provide that any deviation from the agreement can be considered a default.
Examples of common defaults include:
- failing to pay royalties or fees;
- failing to submit or misrepresenting financial information;
- disclosing confidential information;
- suffering financial incapacity;
- abandoning the business;
- misusing intellectual property; or
- purchasing from unauthorized suppliers.
These and other events will trigger certain rights for the franchisor, depending on whether the default gives rise to immediate termination rights, or whether the default can be fixed or ‘cured.’ In most cases, the franchisor will issue a notice of default describing the breach, and setting forth the rights it seeks to enforce.
Q If I am found in default, what happens?
To a large extent, the default and termination procedure will be described in the franchise agreement, which will likely grant the franchisor a great deal of discretion, giving it the choice to note or waive the default, or enforce termination rights.
If the default is curable, the default notice should set out the ways and timeframe in which you can correct it and bring yourself back into compliance. If the default is not cured in the required manner, the franchisor will likely seek to terminate. In other instances, the franchisor may seek to terminate the agreement without notice, and may even sue you for breach of contract.
Even with these contractual rights, most franchisors will have invested time and effort into the franchise relationship and, as such, will usually want to make every effort to preserve it.
Frank Robinson is an associate in the business law and franchise law groups at Cassels Brock & Blackwell LLP in Toronto. He can be reached at firstname.lastname@example.org.