What do I need to know about franchise renewal?

Renewing a franchise agreement can be a complex process, with costs, conditions and potential changes to terms to consider. Here, experts in franchising law and operations explain what you need to know to navigate renewals successfully…

Why do franchisors impose renewal conditions?

Renewal conditions exist to protect a franchisor’s brand, ensure franchisees maintain business standards and encourage franchisees to remain compliant.

Are there costs involved when renewing a franchise agreement?

Yes, renewal can involve costs, although these vary between franchises. Costs may include a specified fee covering the franchisor’s administrative or legal costs, or a fee for a second or further franchise term.

Franchisees might also need to bring their existing operation in line with the new agreement, potentially incurring upgrade costs for premises, vehicles, equipment or stock.

Louise Harris, principal at Franchise Projects, advises prospective franchisees to “engage with [your] franchise lawyer to advise [you] on any hidden fees and the implications of clauses in the franchise agreement that may mean a substantial outlay for renewing.”

Vicky Wilkes, head of legal at Aston Villa Football Club, adds: “The renewal fee differs to the initial fee since the franchisee does not usually get anything for it, other than the option to renew the franchise agreement.

“However, some franchisors may use the renewal fee to pay for upgrades to the physical location of the franchise business.”

John Pratt, senior partner at Hamilton Pratt, notes: “Generally, it is in the franchisor’s commercial interests for those franchisees who are performing well to continue within the franchise. For this reason, they may only charge a fee that covers their legal and administrative costs.”

Can a franchisor decide not to renew my franchise agreement?

Yes, a franchisor can refuse renewal under certain circumstances. Shelley Nadler, legal director at Bird & Bird, explains: “If the franchisee doesn’t satisfy the conditions of renewal, a franchisor may refuse to grant a renewal term. In this case the franchisee’s right to operate the business will come to an end on the expiry of the initial term.”

Conditions typically include material compliance with the original agreement, satisfactory performance and no ongoing breaches.

A franchisor may also require you to make capital improvements, update technology or undergo retraining before it grants a renewal.

Nadler notes: “A franchisor is unlikely to want to renew an agreement with a franchisee who does not perform well or who has been in breach of the franchise agreement.”

Do all franchise agreements offer an automatic right to renew?

Not necessarily. Nadler explains: “Franchise agreements generally offer the franchisee a right to renew, but this right is not automatic. Any renewal right is usually subject to the franchisee satisfying certain conditions.”

How often do I have to renew my franchise agreement?

The frequency and number of renewals depend on the original franchise agreement. John Pratt notes: “Most franchisors in the UK grant agreements for five years. You would expect these agreements to be renewable at least twice, so that a franchisee is ‘guaranteed’ a 15-year term.”

Some long-term agreements, such as 20-year terms, may include no contractual right to renew, though a franchisor may still offer a new agreement.

Could the terms of my franchise agreement change on renewal?

Yes. John Pratt explains that usually you will have to “enter into the franchisor’s then current franchise agreement. This means the franchisor could very substantially change the terms of the agreement.”

While this can be concerning, Pratt says “it would be unlikely a court would allow a franchisor to change the terms so radically that it was a different type of franchise, or that it was no longer commercially viable for a franchisee to operate the franchise successfully.”

If I don’t want to renew, can I take my customers with me?

Franchisees are usually restricted from soliciting their existing customer base after the agreement ends. Nadler warns: “There is often what is called ‘a non-solicitation clause’.”

This will state that for one year after the expiry of the franchise agreement, you can’t directly or indirectly solicit or tout for business from any regular customers.

Consult a specialist solicitor to understand the implications of non-solicitation and other post-termination restrictions.

Key takeaways

Renewing a franchise agreement involves careful consideration of costs, conditions and potential changes to terms.

Make sure to review your agreement closely, engage expert legal advice and ensure compliance with all requirements to maximise the chance of a smooth renewal.

As Shelley Nadler summarises: “The franchise relationship should be capable of subsisting on a long-term basis as long as both parties observe their respective obligations.”