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Why might you need to renew a franchise agreement, and how often should I expect to do so?
Shelley Nadler writes:
Most franchisors grant an initial term to operate their franchise business with a right to renew for a further period or periods. The franchise relationship should be capable of subsisting on a long-term basis as long as both parties observe their respective obligations. There may be various reasons – including legal reasons where the agreement includes the tied supply of products – for a relatively short initial period, say five years, but most franchise agreements allow for the franchisee to be able to exercise a right of renewal.
It is common for franchise agreements in the UK to be for a five-year initial term with a right to renew for a further period of five years. In some cases, two rights of renewal will be granted so that the franchisee has an initial term of five years and then rights to renew for two further periods of five years at years five and 10 (so potentially 15 years in total). In a few cases, franchisors grant lengthy terms (for example 15 years) with no rights of renewal. In such cases the franchisor may well offer a new franchise agreement at the end of the 15-year term but it will be under no obligation to do so.
It is important that a franchisee checks on the right of renewal in the franchise agreement and the date this has to be exercised by. If the renewal right is not exercised then the term of the franchise agreement will expire and the franchisee may have to cease trading its franchise business.
The right of renewal is usually granted subject to the franchisee satisfying certain conditions and these should all be set out in the franchise agreement. For premisesbased franchises renewal is often tied into the refurbishment cycle and a condition of renewal will be the premises are refurbished to latest standards and trade dress of the franchise business.
Shelley Nadler is a legal director in Bird & Bird’s international franchising team and has many years’ experience of advising on all aspects of franchising.
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