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Upon what basis can a franchisee terminate a franchise agreement?
A franchisee’s right to terminate is regulated by the provisions of the franchise agreement and common law.
In relation to the franchise agreement, generally franchisees are not given a right to terminate, unlike franchisors, which can terminate for a range of franchisee misdemeanours. That is not as unfair as it sounds because generally franchisees do not want to terminate a franchise agreement. What they want is for the franchisor to do what it has contracted to do. A franchisee will always have the right to bring a damages claim against the franchisor.
Nevertheless, even in the absence of any contractual right to terminate, common law gives franchisees the right to terminate if the franchisor commits such a serious breach of the franchise agreement that it appears the franchisor no longer wishes to be bound by its terms. That is difficult, but not impossible, to prove.
Even without a right to terminate, it may be possible to negotiate a termination with the franchisor. While franchisors do not want franchisees entering into the franchise and then changing their mind, franchisors generally recognise there may be little point in retaining a franchisee who no longer wants to be involved in the franchise.
In such circumstances, negotiations will take place as to what payment a franchisor requires from the existing franchisee to compensate the franchisor for the loss it suffers as a result of the franchisee’s withdrawal.
John Pratt is senior partner at specialist franchise firm Hamilton Pratt and has advised franchisors for over 25 years.
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