One of my franchisees has abandoned his franchise, what do I need to do?
Most franchisees operate their franchises in an active manner, in accordance with their franchise agreement and by putting in a lot of hard sweat and tears.
However, occasionally franchisors face a scenario, when one of their franchisees walks away from the franchise. If you, as a franchisor, are facing a situation where one of your franchisees has abandoned their franchise business, you should consider your position carefully prior to taking any action.
There are many reasons franchises simply walk away from their franchise business, including:
- Not making enough money
- Feeling like the franchisor does not provide adequate support
- Believing the franchisor has breached the franchise agreement
- Having a change in personal circumstances, including family issues, divorce, death and other related matters
The Franchising Code of Conduct provides the procedure for terminating franchisees, which, in most cases, requires service of a notice of breach and allowing the franchisee to remedy the breach.
However, clause 29(1)(d) of the Franchising Code of Conduct provides that a franchisor does not have to follow the breach provisions in clauses 27 and 28 of the Franchising Code of Conduct and may immediately terminate a franchise agreement if the franchisee voluntarily abandons the franchised business or the franchise relationship.
However, in order to immediately terminate a franchisee who has walked away from their franchise business, you must be sure that there is an abandonment and that such abandonment is voluntary.
Abandonment may take many forms, including closing the premises for business, laying off all staff members or telling suppliers, and in many cases the franchisor, that the franchisee will no longer trade.
The first and foremost important factor in any franchise relationship is open communication. You should be aware if there are any issues with any of your franchisees and try to address these issues before any drastic actions have been taken.
You should know if a franchisee is considering walking away from their business, the reasons behind the franchisee’s decision and whether it is temporary or permanent.
Temporary closure may be required as a result of family death or illness and may not satisfy the voluntary requirement of clause 29(1)(d) of the Franchising Code of Conduct. If you maintain the communication channels, you may be able to assist the franchisee during the family crisis and avoid any such closure.
These days most franchisors do not hold leases in their name. However, if you are the tenant on the lease, you would want to know as soon as the franchisee walked away from the business, as you may face legal action against you by the landlord. This may include a notice of breach of the lease, following by termination of the lease and being sued for the remaining portion of rent and outgoings due for the lease term.
As soon as you learns of the abandonment of the franchise business, you should communicate with the landlord to ensure that any loss of the landlord is mitigated.
If the franchisee has voluntarily abandoned their business, you may:
- Terminate the franchise agreement, effective immediately
- Sue the franchisee for the fees due for the remainder of the franchise agreement, if such fees can be quantified
- Sue the franchisee for any unpaid rent and outgoings under a licence or sub-lease agreement, if you are the tenant named on the lease of the premises
- Exercise its rights against any of the guarantors under the franchise agreement (and the licence agreement, if applicable)
- Depending on which party holds the lease as the tenant and the provisions of the lease, re-enter the premises of the franchise business to re-open the franchise business.
Each situation of abandonment should be judged on its merits and you are strongly advised to seek legal advice prior to undertaking any steps in relation to any abandonment of the franchise business.