Termination and Non-Renewal
Termination or refusal to renew a franchise is not only one of the most frightening prospects for a franchisee but is also very complex. You need to understand your rights and obligations if you are faced with either one.
Termination and non-renewal are similar concepts, but there are critical differences. Termination is the cancellation of the franchise before the end of its time period. Non-renewal occurs when the franchise agreement comes to an end and the franchisor does not renew it.
In most franchise systems, termination means that you, the franchisee or dealer, are put out of business. Once the franchise agreement is terminated, you may no longer have the right to use the franchisor’s trademarks and will have to stop using them in all respects, and typically there is a covenant not to compete in the franchise agreement that will bar the franchisee or dealer from working in the same business for 18 months to 3 years. If the termination date comes without being stopped, it will be much harder to undo. Indeed, if the termination was against the law, the only remedy for the franchisee at that point is to sue for damages.
Whether the franchisor can terminate you or not depends upon a number of factors, including what your agreement says, what state law says, what type of industry you are in, and what the franchisor is claiming as the reason for termination. Oftentimes, particularly with dealerships (as distinguished from business format franchises), the manufacturer or franchisor may attempt to terminate, and state law will provide that it cannot. Sometimes the franchise or dealer agreement will not be clear, and the franchisor’s right to terminate will not be obvious. Other times, the conduct that the franchisor accuses the franchisee of engaging in is not sufficiently serious to result in termination.
The remedy for a termination that is wrongful or against the law is to stop it before it takes place. But this can only be done if you get help before it happens.
If you are concerned about your franchisor terminating you, or if you have received a notice of default or termination, you should immediately seek legal advice. Many terminations can be stopped before they take place, but only if you move quickly. Click here to contact us if you have received a notice of termination.
A non-renewal is the franchisor’s refusal to renew your agreement when it expires. Your right to have your agreement renewed at its expiration depends on many circumstances, including where you live, what your franchise or dealer agreement says, and the practices of the parties over the years.
The consequences of non-renewal, however, are the same as termination in most cases: the franchise ends, and you no longer have the right to use the franchisor’s name or marks. In addition, your franchise agreement probably also contains a covenant not to compete, which means that you cannot work in the same business for two to three years.
Another set of questions that comes up when you renew is whether the franchisor can make you sign a new agreement or impose new requirements or higher royalties upon you. This issue depends on what those requirements are, what state you live in and how burdensome the new requirements are. If your franchise is coming up for renewal, please contact us to make sure that your rights are protected.