Termination and Non-Renewal of a Franchise
All franchise relationships end sometime, usually by the franchisee selling the franchise, dropping out of the franchise system or getting kicked out. In this article, the author briefly summarizes what happens when a franchisee sells, leaves or quits a franchise system, or when the franchisor terminates or refuses to renew the franchise.
Franchisee's Sale or Quit of the Franchise
Selling the Franchise. The best way for a franchisee to get out of a franchise system is to sell the franchised business. In California, there is no special law that protects a franchisee's right to transfer a franchise. The matter is governed by the Franchise Agreement, which usually requires the franchisor’s consent, said consent not to be unreasonably withheld.
Quitting the Franchise System. If the franchisee can’t sell the franchised business, then sometimes all he can do is walk away from it. Here the franchisee’s biggest worry is that the franchisor will sue to recover liquidated damages that are specified in the Franchise Agreement, or to recover the franchise royalties and fees that the franchisee would have paid had he stayed in the system until the end of the term.
I cannot give generalized advice that covers all scenarios for the end of a franchise relationship. Instead you must look at a range of issues, including the precise language of your Franchise Agreement, the franchisor’s claim for lost franchise fees, the franchisee’s counter-claims and defenses, and more. See my article Legal Claims and Defenses in Franchise Litigation, for more discussion of possible liability, claims and defenses when a franchisee leaves a franchise system (whether voluntarily or involuntarily).
The franchisor also might try to enforce a non-competition clause in the Franchise Agreement. For more on this subject, see my article Franchise Non-Competition Agreements in California.
Franchisor's Termination or Non-Renewal of the Franchise
A franchisor terminates a franchise if she cancels the franchise before the end of the term. Non-renewal occurs if the franchisor refuses to renew the franchise at the end of the term. The result is the same for both termination and non-renewal – the franchisee loses the franchise. Be aware that under California law, a non-renewal might occur if the franchisor makes unreasonable changes in the royalties, fees and terms of the franchise, where the changes have the effect of inducing the franchisee not to renew.
In California, a franchisor must have good cause to terminate or to refuse renewal of the franchise. Good cause includes failure by a franchisee to cure a breach of the Franchise Agreement within a reasonable cure period after written notice of default (up to 30 days), except for certain non-curable defaults which justify termination immediately upon written notice. Failure to pay franchise fees gets a 5 day cure period.
When faced with a possible termination or non-renewal, it is extremely important that the franchisee take action before the termination or non-renewal happens: First, it is easier to keep a franchise than to get it back. Second, if the franchisee loses the franchise, he might lose the cash flow needed to pay for the fight. Third, California franchise law does not provide much by way of statutory damages for an illegal termination or non-renewal. In brief, as soon as the franchisor gives notice of the possibility of termination or non-renewal, the franchisee must respond quickly and cut-off the dispute before it gets too far along.
Once the dispute gets a little momentum, then the two sides must prepare for war.
I’ve tried to make this article as simple as possible. California franchise law is very complex, however. You need a competent franchise attorney to help you.
ABOUT THE AUTHOR: Matt Dickstein
Matt Dickstein, Business Attorney, provides business legal services in the San Francisco Bay Area and the Silicon Valley, California, including San Jose, Palo Alto, San Francisco, Oakland, Hayward, Fremont, Walnut Creek, Pleasanton and Sacramento.
Since 1994, I have been representing businesses of all types, big and small. I handle business transactions, corporations & LLCs, real estate ventures, professional practices, and franchises.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.