Franchise Termination Laws

A franchise agreement may end through cancellation when the franchisor or franchisee terminates the contract or nonrenewal when the franchisor refuses or fails to renew the agreement. The franchise agreement ordinarily details the rules and procedures governing contract termination. States also have laws that regulate the franchise relationship and explain the circumstances under which parties may terminate the franchise.

One party to a franchise contract may terminate it when the other party commits a material breach of the terms and conditions and does not cure it within a reasonable period even after the aggrieved party demands it. A material breach on the part of the franchisor is failing to provide training and support in franchise operations, misrepresentation of potential profits and failing to safeguard the franchisee’s territory. The franchisee is in material breach when he fails to report revenues and pay royalties to the franchisor, loses his licence or goes bankrupt.

State franchise laws require franchisors who wish to terminate their franchise agreements with franchisees to issue adequate written notice setting forth all the reasons for the cancellation or nonrenewal. For example, in New Jersey a franchisor is in violation of the franchise relationship statute if he fails to issue such notice. The notice period ranges from state to state but is set at 60 days in most states. When the franchisee has voluntarily abandoned the franchise, the notice period is reduced to 15 days.

According to prevailing state laws, it is unlawful for a franchisor to terminate the agreement without good cause unless the franchise agreement contains a clause allowing termination for no cause. If the franchisee substantially complies with the terms and conditions of the agreement, the franchisor should extend the benefit of an infinite franchise and the franchisee should not be terminated or refused renewal. It is up to the franchisee, however, to prove that the franchisor acted unfairly in terminating the franchise agreement. If a franchisor has kept a record of franchisee defaults and warnings, the franchisee may be hard-pressed to demonstrate lack of good cause to terminate.

Franchisees are subject to post-termination agreements, which the franchisor may enforce through law suits filed in state courts. Franchise agreements usually contain post-termination clauses to guide the activities of the franchisees when they are no longer operating the franchise. The post-termination agreements could restrict former franchisees from opening up their own parallel businesses to compete with the franchisor and require them to return all the franchise materials and refrain from encroaching on the franchisor’s territory. The agreements could also require franchisors to buy back their inventory and take over the franchisee’s lease and operate on the premises until it is time to surrender the lease.