Q: What notice to the franchisee is required for the franchisor to terminate a franchise agreement?
A: This is a critically important question that has very serious implications for both franchisees and franchisors. And while it may seem fairly straightforward at first, it cannot be answered with a simple sentence or two.
Rather, as is the case with much of the legal analysis relating to franchisor-franchisee relations, the answer will depend on many factors, each of which must be considered in the context of the complete relationship between the parties:
- What are the franchise agreement’s requirements relating to termination?
- Are there any other documents that may deal with the issue?
- What has been the conduct of the two parties?
- What has been the history of dealings between the parties with respect to defaults, terminations and notices?
- Is there any provincial franchise legislation that deals with the issue?
- Do any general rules of contract interpretation affect the analysis?
Check the wording
The starting point is the wording of the franchise agreement itself. And the first issue in this respect is whether or not the agreement can only be terminated by reason of default by the franchisee.
If the franchise agreement clearly addresses the issue of default (e.g. for the non-payment of fees to the franchisor), then the franchisor must be able to establish how and why the franchise agreement is being terminated, both by outlining the reasons for termination and by giving notice as required under the terms of the franchise agreement. Also, if the franchise agreement is being terminated by reason of an overriding event outlined in the agreement (e.g. bankruptcy of the franchisee), then the franchisor must give notice as required under the franchise agreement and must outline the event that has given rise to termination.
If the agreement allows the franchisee to ‘cure’ the default during a certain period following the notice, then the franchisor cannot terminate the agreement until (a) that period has passed and (b) the franchisee has not cured the default.
In some cases, however, a franchise agreement may even allow for termination without default or on occurrence of an overriding event. The agreement may simply allow for termination with notice. Usually, this involves termination after a specific period following the notice (e.g. 60 days).
In these cases, if (a) the number of days has been clearly spelled out in the franchise agreement and (b) the franchisor subsequently follows the prescribed method of giving notice to the franchisee, then the agreement will be terminated on the date specified. No reasons for the termination need to be given, other than reference to the provision in the franchise agreement allowing for termination with notice.
In some cases, a franchise agreement is subject to termination if the franchisee is in default of another collateral agreement between the franchisee and (a) the franchisor or (b) a third party. Examples would include a lease, sublease, loan agreement, personal property security agreement or guarantee.
In these situations, the termination procedure is similar to cases where there is a specified default. As long as the franchise agreement allows for termination for default under the collateral agreement in question, the franchisor can terminate by outlining the reasons for default and giving notice as required.