Lawyer Emily Sadler looks at your legal options if your franchise isn’t working out.
Sadly, it is common for franchisees to think about terminating their agreement if it is not working out. As there is no specific franchise law in the UK, a franchisee must look carefully at the terms of their signed franchise agreement.
Generally speaking, no. Almost all UK franchise agreements are for a fixed term of typically five years and the franchisee is committed for this length of time to operate the franchise business. If you were to simply cease trading, you could face a claim from the franchisor for its loss of revenue for the duration of the contract left to run.
One option would be to exercise your right to sell the franchise business under the agreement. However, finding a buyer is often problematic, especially if the business is in its infancy or isn’t profitable.
It may be the case that you feel the business hasn’t worked out due to some failing(s) on the part of the franchisor. The problem is that franchise agreements are drafted in favour of the franchisor and, more often than not, don’t contain a contractual right for a franchisee to terminate the agreement due to the franchisor’s breach of contract. Also, a franchisor’s contractual obligations under the agreement are often drafted in a vague manner so it’s not always easy for a franchisee to be able to point to clear contractual obligations which the franchisor is in breach of.
Alternatively, a franchisee may be able to terminate under their common law rights, but only if the breach is so fundamental that it has deprived the franchisee of the whole benefit of the contract – for example, if no manual or training has been provided whatsoever.
It’s really difficult to prove a franchisor’s fundamental breach of contract, so franchisees often look to the law on misrepresentation to see if that can offer a way out. In franchising terms, a misrepresentation is usually associated with financial projections for the franchise business being plainly incorrect or recklessly made by the franchisor. The misrepresentation must have induced the franchisee to enter into the agreement.
Many franchise agreements contain clauses attempting to exclude a franchisor’s liability for misrepresentation. However, if a claim is successful, the franchisee can rescind the contract.
It’s important for franchisees to remember that if the franchisee business isn’t working out (despite any perceived failings of the franchisor) they too may be in breach of the franchise agreement. In contrast to the position for franchisors, franchise agreements contain many onerous and specific obligations on franchisees which could be relatively easy to fall foul of.
I would strongly advise franchisees not to seek to terminate their agreement or simply to cease trading without first taking legal advice in order to understand their options and what the repercussions could be of each option. As mentioned, you could find yourself facing a significant financial claim or counterclaim from your franchisor if you bring your agreement to an end incorrectly.
Franchise agreements also contain restrictions on what a franchisee can and can’t do once the agreement has terminated. Such clauses could prevent a franchisee from working in a competitive or similar business for a period of time.
In addition to the legal options outlined above, there’s always the possibility of a commercially negotiated exit. This is when the franchisor agrees (ideally in a written settlement agreement) that you can exit your franchise agreement early, with both parties agreeing not to pursue legal claims against one other – a ‘clean break’. These are negotiated on a case by case basis, will be fact dependent and not provided for within the franchise agreement.
*Emily Sadler is a partner in the franchising team at Paris Smith solicitors. Emily has over 10 years’ experience drafting and advising on a wide range of commercial contracts and is an accredited professional advisor member of the British Franchise Association. She advises franchisors and prospective franchisees on all aspects of their agreements. She has drafted many franchise agreements across various sectors, and is on the panel of recommended lawyers for a major high street chain of hairdressers and a domiciliary care franchise for her franchisee work. More information here.