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Navigating the franchise relationship can be tricky, especially when a franchisee breaches the franchise agreement. If your franchisee breaches the agreement, you must undertake several steps, including urgently seeking legal advice and giving notice of the breach. This article will further explain the steps you should take when a franchisee breaches the franchise agreement.
The Franchise Agreement
Franchise agreements are legally binding documents that impose contractual obligations on franchisors and franchisees. If either party fails to comply with the franchise agreement, this amounts to a breach of contract. It sets out aspects such as:
- the roles and responsibilities of the franchisee and franchisor;
- payment obligations;
- renewal terms; and
- termination terms.
The franchise agreement should be robust and protect you, your business, and the franchisee. Ensure that you draft it clearly and include sufficient detail. It is advisable to seek legal advice when preparing a franchise agreement, as it forms a foundational pillar of your franchise network.
In some cases where a franchisee breaches the franchise agreement, the franchisor may terminate it. You will specify the actions and inactions that can amount to a breach within the agreement’s text. A franchisee’s breach of a franchise agreement can significantly affect your brand’s reputation. Some common franchisee breaches include:
- failure to pay fees;
- misuse of the franchisor’s intellectual property;
- jeopardising the franchise business’s reputation;
- poor performance standards;
- failure to comply with the franchise operations manual; and
- failure to comply with a post-termination restriction.
What to Do if a Franchisee Breaches the Franchise Agreement
1. Seek Legal Advice
An experienced franchise lawyer can advise you on the action you should take in case of a breach. It is advisable that you seek advice when you first notice a franchisee’s breach.
Seeking professional legal advice ensures that the process of handling the breach begins and operates smoothly. A lawyer can carry it out in a legally sound manner, which mitigates the risk of future legal disputes.
2. Give Notice of the Breach
If you find that the franchisee has breached the agreement, you will issue a notice of the breach to that franchisee. The franchise agreement details what this notice should include. In the notice, you will tell the franchisee what agreement term they have breached and how long they must provide a remedy. You will also attach evidence of their breach.
3. Terminate the Agreement
Some circumstances may allow you to terminate the agreement. You will include these within the franchise agreement.
Termination clauses set the conditions under which a franchisee or franchisor can terminate the agreement. Whether you can end the contract due to the breach depends on the termination clause’s wording.
Breach of contract is usually a condition under which a franchisor can terminate the agreement. If the franchisee fails to comply with the notice, you may be able to terminate. At this point, you might speak to the franchisee to negotiate termination and what will happen to their business. Or, you can issue a notice of termination if the franchisee is not open to negotiate.
This handbook covers all the essential topics you need to know about franchising your business.
The termination clause may stipulate a notice period or further requirements during the termination process. Ensure you follow these requirements.
Termination is often tricky and emotionally charged as it involves taking the franchisee’s business away from them. You must follow the terms set in the contract and seek professional legal advice. Otherwise, you can face legal disputes, which can be costly and may damage your brand’s reputation. A lawyer can help you to navigate this process.
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Key Takeaways
If a franchisee breaches the franchise agreement, you should seek legal advice. A lawyer can help you to navigate this complex process and mitigate the risk of costly future legal disputes. The next step you should take is to notify the franchisee of their breach, alerting them to the fact they have committed a breach and telling them which term of the agreement they have violated.
The following steps you should take depend on what happens here and the specific terms of your franchise agreement. For example, if the franchisee complies with the notice of the breach, you may continue your business relationship. Alternatively, if they do not comply with the notice and cannot remedy the situation, you may have the right to terminate the agreement. You must follow the relevant terms when you carry out the termination process.
If your franchisee has breached the franchise agreement, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to LegalVision’s experienced franchise lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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