Does a franchisee have a right to request a renewal on expiration of the initial term? In what circumstances can a franchisor refuse to renew a franchise agreement? If the franchise agreement is not renewed or it if it terminates or expires, is the franchisee entitled to compensation? If so, under what circumstances and how is the compensation payment calculated?
Franchise & Licensing
Article 25 of Law 18/03 provides various reasons for terminating a franchise agreement, including expiration on its initial term or renewal. Franchise agreements can last for a specific period or an indefinite period, depending on what has been agreed upon between parties; in the first case, if the parties continue to perform the contract after its initial term, this shall be deemed to be converted into an indefinite term contract.
In principle, franchisees do not have the right to request for the renewal of the franchise agreements entered into for a definite period, unless this has been specifically agreed between parties and provided in the franchise agreement (for instance, if the parties agreed that the contract shall automatically renew on its term, etc.).
In relation to franchise agreements entered for an indefinite period, they shall terminate upon written notification sent by either party to the other, which an advance period of 1 month, if the contract has lasted for less than 1 year; 2 months, if the contract has already started its second year of execution; 3 months in the remaining situations. Failure to comply with the notice periods mentioned above, shall lead the infringing party with the duty to compensate the other party for the damages suffered with such breach.
Regardless of the reasons for the contract termination, it should be noted that franchisees can also be entitled to goodwill compensation (this is originally foreseen for agency agreements, but shall be applicable mutatis mutandis to the franchise agreement as well), whenever the following reasons are met:
i) the franchisee has engaged new customers for the benefit of the franchisor or has significantly increased the business volume of the existing clientele;
ii) the franchisor has significantly benefited from the franchisees’ activity, even after termination of the contract;
iii) the franchisee has failed to receive any subsequent payments due for contracts negotiated and concluded by the franchisees, after the termination of the franchise agreement.
Generally speaking, no. There are no statutory rights of renewal available for franchisees. If the franchise agreement does not provide for renewal of the agreement, then on expiry, the franchisor is not required to renew or extend the agreement. If the franchise agreement provides the franchisee with a right to renew the agreement, then such provisions will apply to the franchisor’s right to renew or not renew the agreement. The franchisee’s failure to comply strictly with all of the renewal requirements under the franchise agreement will entitle the franchisor to refuse to renew the agreement. However, if the franchisor has previously granted renewals to the franchisee, Canadian common law (and any applicable statutory duty of fair dealing) may require the franchisor to give the franchisee reasonable notice of its intention not to grant a further renewal.
In instances where the franchisee is not granted a renewal, there is no statutorily-mandated compensation due to the franchisee from the franchisor.
Local law does not vest franchisee with a right to request a renewal on expiration of the initial term. Also, there is no mandatory compensation payable to a terminated party (including a franchisee) if termination is effected on expiry of the agreement, whether or not there has been a breach on the part of the franchisee. It should be noted, however, that the franchisee can claim that it was reasonably led to believe that the agreement would be extended, resulting in expenses and business expectations for which compensation is due if, for example, any of the following occurred during the term of the agreement: (i) the parties entered into early and informal negotiations aimed at extending the term of the agreement or at introducing changes that would apply beyond the contractually stipulated termination date; (ii) the parties discussed the possibility of a market research to determine sales forecast covering a period beyond the termination date; (iii) the parties exchanged correspondence regarding actions or events to take place beyond the termination date. Proof of the foregoing is provided by exchange of e-mails and/or other relevant documentation.
The franchisor has no duty to renew the franchise agreement upon expiration of the initial term, unless such extension right has been expressly agreed between the parties. The franchisee may request a renewal upon expiration of the initial term, however, the franchisor is entitled to refuse such request from the franchisee.
Danish law does not recognise a compensation to the franchisee where the termination of the agreement is lawful, except possibly only in exceptional cases offering very special circumstances, which according to case law relating to distributors could be the case, if the distributor has not been duly compensated for its efforts due to the (short) duration of the agreement.
This could be the case if a distributor, despite fixing its own resale prices and otherwise being responsible for the commercial risks, has not been duly compensated for its investments, etc. at termination; for example, if the duration of the agreement was very short, and if the distributor also actively transfers the customer records, etc. to the supplier at termination, provided that the identity of the customers is not generally known. In a case before the Danish Supreme Court on 25 April 2000, a terminated dealer was, under very special circumstances, awarded compensation in the amount of 200,000 Danish kroner. In the ruling, the Supreme Court clearly stated that under normal circumstances an independent distributor will not be entitled to any compensation upon termination of the distributorship.
However, in this specific case, the Supreme Court awarded the terminated dealer the compensation mentioned with reference to the fact that the termination of the dealership had taken place with no reasonable explanation and without taking the dealer’s interests into consideration (very disloyal behaviour towards the terminated dealer), and with reference to the fact that the terminating supplier in question had taken over the customer base built up by the dealer, thereby preventing the dealer from being duly compensated for its investments in marketing, etc.
Pursuant to Article 728 of the Civil Code of the Republic of Azerbaijan, duration of the franchise agreement is determined by the parties considering the demand for the sale of goods and services, meaning at their own discretion. If the term of the contract is more than ten years, any party may cancel the contract via termination notification submitted 1 year in advance. If parties do not use their right to terminate the contract, the contract is extended automatically for the period of two (2) years. In the event of expiration or termination of the franchise agreement, parties shall try to preserve business relations on the same level until their factual termination, although there is no fixed mechanism for that.
Determination of the contract duration, renewal or non-renewal are subject to the parties’ discretion as agreed in the contract. However, if the contract was silent on the renewal, nothing legally prohibits the franchisee from requesting renewal.
In the event the parties have agreed on a renewal provision and the franchisor refuses to renew this may be considered as a breach to the agreement and, in this case, the franchisee shall have the right to claim compensation for the damage incurred. However, if the parties have not agreed on a renewal provision, the renewal of the contract shall be subject to the acceptance or rejection of the franchisor and in this event a compensation cannot be claimed.
It should be noted that the franchisee may claim compensation as a result of: i) the franchisor terminated the contract without reason and said termination incurred damage to the franchisee, or ii) if the franchisee has terminated the contract for reasons attributable to the franchisor’s breach of the contract.
The compensation shall be calculated in light of the loss suffered and the profits/gain missed.
There is no legal right of renewal. A franchisor therefore can freely refuse to renew a franchise agreement upon expiration.
There is also no regulation governing termination indemnities, however, courts may increase or decrease a patently low or excessive compensation agreed to by the parties. In addition, courts may order damages upon the sudden or abusive termination of a franchise agreement.
The term of a franchise agreement and the conditions of renewal or extension thereof are freely agreed by the parties. Unless otherwise agreed, the franchisee does not have the right to request a renewal on expiration of the initial term.
According to art. 9 of PD 219/1991 on commercial agency agreements, which may be applicable by analogy to franchise agreements (see Q. 15), upon termination or expiration of the franchise agreement the franchisee is entitled to clientele indemnity if and to the extent that (a) during the agreement he has brought the franchisor new customers or has significantly increased the volume of business with existing customers, (b) the franchisor continues to derive substantial benefits from the business with such customers and (c) the payment of such indemnity is equitable having regard to all the circumstances. The amount of the indemnity to which the franchisee is entitled in accordance with the above may not exceed a figure equivalent to the franchisee’s average annual gross profits over the preceding five years. If the contract goes back less than five years the indemnity is calculated on the average for the period in question.
Clientele indemnity is payable in all cases of expiration or termination of the franchise agreement for any reason (i.e. including expiry of the agreed term thereof, lawful termination with prior notice of a franchise agreement of indefinite term, death of the franchisee) other than: (i) termination of the franchise agreement by the franchisor due to franchisee’s fault which would justify termination at any time with immediate effect or (ii) termination of the franchise agreement by the franchisee, unless such termination is justified by circumstances attributable to the franchisor or on grounds of age, infirmity or illness of the franchisee in consequence of which he cannot reasonably be required to continue his activities, or (iii) where, with the agreement of the franchisor, the franchisee assigns his rights and duties under the franchise agreement to another person. Any waiver by the franchisee of his claim for clientele indemnity prior to the expiration/termination of the franchise agreement is null and void.
In addition to the above, the franchisee may be entitled to compensation for expenses incurred or for damage suffered (including actual damage, loss of profit and compensation for “moral prejudice”) under the conditions of the general provisions of the Greek Civil Code on mandate and torts.
In order to renew a franchise agreement, an amendment agreement to the franchise agreement is usually executed, modifying its duration and any other provisions which would need to be modified for such purposes.
A new franchise agreement may also be entered into for this effect, executed under the terms of the franchise agreement currently being used by the franchisor at such time or under different terms and conditions, if agreed by both parties. This option would result in an obligation for the franchisor to comply with the disclosure obligation again.
If the original franchise agreement does not contain any renewal provisions or rights, upon the expiration or termination thereof, the franchisor is free to refuse the renewal of such agreement.
The franchisee would not be usually entitled to compensation in the event that the agreement was not renewed once it was terminated or expires, but if the renewal right is conferred to the franchisee in terms of the relevant franchise agreement, and the franchisor denies such renewal, then the franchisee will be entitled to a compensation for damages and losses derived from a breach of the franchise agreement.
Prior to the issuance of the decision No. 1106/2009 by the Court of Appeal, it was considered that Article 4 of Law No. 34/67 applied to this case. Article 4 of Law No. 34/67 states:
“The commercial representation contract must be considered as having been concluded in the joint interest of the contracting parties.
Thus, breach of the contract by the principal without he agent’s fault or other valid cause, entitles the latter, notwithstanding any agreement to the contrary, to claim for compensation equivalent to the damage sustained and to the unrealised profit.
Likewise, the commercial representative is entitled, even when the contract has come to expiry, and notwithstanding any agreement to the contrary, to claim for compensation which the court shall assess, if his activity has promoted with manifest success the launching of the trade mark represented or has increased the number of its customers, while he is not enabled to reap the fruit of this success because of his Principal’s refusal to renew the representation contract.”
However, in view of the Court of Appeal’s decision, the franchise agreement is no longer subject to the above article unless and until the above-mentioned decision is successfully challenged.
The franchisee may request so provided that such right is agreed by the parties. There are no mandatory requirements for the franchisor in refusing to renew the franchise agreement, and the circumstances depend fully upon agreed terms by the parties. The franchisor can even not give the franchisee the right of renewal on expiration of the initial term. The franchisee shall be entitled to compensation provided that such compensation clause is properly stipulated in the agreement which has been satisfied when the agreement is not renewed or terminates or expires, and this means the franchisee will not automatically be entitled compensation where there is no clear provision when the agreement is terminated. The circumstances and method in compensation payment also depends on the agreed terms by the parties, and there is no mandatory laws or guideline yet in China.
There is no local law that obliges the franchisor to renew a contract, unless it has been included as an obligation under the original franchise agreement. Under Peruvian legislation, there is no mandatory compensation payable to the franchisee at the end of the term established by the parties. However, one party can terminate an agreement before its expiration in the event of a material breach of contract by the other party. The specific procedure must be stated in the agreement, according to the Peruvian Civil Code.
The relationship between franchisor and franchisee is contractual in nature. Parties are free to stipulate terms on extension or renewal, post-contract compensation, and the circumstances which prompt the same provided these are not contrary to law, public order, public policy, morals, or good customs. Hence, the original franchise agreement may provide for the renewal of the franchise without the execution of a new contract.
Normally, a renewal clause is included in a standard franchise agreement and may be exercised by the parties prior to the expiration of the original term subject to conditions as regards payment of renewal fees and/or fulfilling continuing qualifications set by the franchisor on the franchisee. When these conditions are not met, the franchisor may lawfully decline a renewal of the agreement.
The franchise agreement should be for a term of years with a right of renewal of a fixed term of years. If the initial term is going to expire then a franchisee can request a right of renewal provided the agreement allows for that. A franchisor may be able to refuse consent to a franchisee to renew a franchise agreement if the franchisee has breached the agreement during the term or if the franchisee is in arrears of payments required to be made to the franchisor.
Ys, the franchisee has a “right of first refusal” under Russian law. If the franchisee has performed its contractual obligations in a timely and proper manner, it has a pre-emptive right to re-conclude the franchise agreement for a new term with the franchisor. When re-entering into the franchise relationship, parties are free to amend or modify the terms and conditions of the underlying contract. If the franchisor refuses to enter into the franchise agreement for a new period with the former franchisee, and within a year it concludes a new franchise agreement granting the same rights to the other (third) party and under the same terms and conditions, the former franchisee is entitled (at its option) to claim in court the transfer of franchise in its favour and reimbursement of damages, or simply the reimbursement of damages. However, if the franchisor does not grant the same franchise to a third party by making a new franchise agreement within a year, or sells different franchise rights to a third party, or offers a franchise to a third party under non-similar (other) terms and conditions, the franchisee’s right of first renewal will not arise. The franchisor may refuse to renew the franchise agreement with the franchisee if the latter has failed to perform its obligations in compliance with the terms and conditions of the underlying contract.
The general rules is that a franchisee has no right to the renewal of the contract when it has come to an end, if not expressly provided in the agreement. This means that at the expiration the agreement simply ceases to be in effect and the franchisee has no right to request a renewal and/or to receive compensation.
On the contrary, if the franchise agreement provides a right of renewal, and the franchisor refuse the renewal without a justified reason, then the franchisee will be entitled to compensation.
Unless the franchisor grants the franchisee an express right of renewal in the franchise agreement, a franchisee will not have an automatic right to request a renewal.
It is, however, common practice to include at least one right of renewal within the franchise agreement. The right is often subject to the franchisee meeting certain pre-agreed conditions and it is not common to charge a renewal fee (although not prohibited by law). If the franchisor refuses to renew the initial term in breach of a specific right of renewal, the franchisee could claim contractual damages for breach.
Although the BFA Code does not require a right of renewal to be included in the franchise agreement, it does require that if there is one, its basis is clearly set out.
Unless the franchisee is, unusually, acting as a commercial agent it will not be entitled to compensation on expiry or termination of the franchise agreement. If the franchisee is acting as a commercial agent the Regulations provide that it may claim compensation or an indemnity from the franchisor on expiry or non-renewal of the franchise agreement.
There are no mandatory rights for a franchisee to request renewal on expiration of the initial term, unless such right is agreed upon. As such a franchisor is generally entitled to refuse renewal of a franchise agreement. However, if a franchisee can argue that not renewing a contract would be considered unreasonable or defying good business practice, the refusal of renewal could be disputed. This has been discussed in legal litterature, particularly related to situations where a franchisee has met all sales requirements and otherwise acted in accordance with the franchise agreement, or situations where the franchisee would be left unable to recover investments made during the contract period, due to short remaining contract period.
The issue with compensation upon expiry or termination of a franchise agreement has been subject to studies and legal writings in Norway and is a complex matter. The starting point is that there are regulations in place for compensation in the Norwegian Agency Act, which regulates the business relation between commercial agents and their principals. There are examples in case law where plaintiffs have argued that rights to such compensation also exists in other business relations, such as agreements for sole distributors, based on interpretation by way of analogy from the Agency Act.
Without going into the finer details of the nature of such compensation, some studies argue that the principles of compensation which by law is applicable on agency agreements could also apply to franchise agreements. It is also argued that unwritten principles of compensation apply generally without analogy from the Agency Act.
In case law, there are examples of cases involving sole distributors, but not franchisees. The Surpreme Court rejected such a claim from a sole distributor in 2014 clearly stating that the principles of compensation derived from the Agency Act was not applicable by way of analogy in a case involving a sole distributor. Borgarting Appeal Court has concluded similarly in a case from 2015. The same arguments used in these examples from case law, can be applied also in franchise agreements.
In conclusion, the Surpreme Court has been reluctant to apply the compensation principles in other relations than on agency agreements. The matter of compensation should however be clearly regulated in the franchise agreement in order to establish the parties' common opinion on this matter at the start of the contract period and therefore mitigate the risk of claims for compensation based on the principles briefly described above, upon expiry.
Please note that according to the Tenancy act (1999) a lessee of a business property could on certain conditions be entitled to compensation from the lessor for the gain obtained by the lessor as a consequence of the circle of customers developed by the lessee. From a franchisor perspective it should be considered to enter into any lease agreement with a franchisee separately from the franchise agreement, and preferable by a separate entity other than the franchisor.
Except for those United States jurisdictions that have enacted laws regulating a franchisee’s right to renew and limitations and conditions imposed on a franchisor’s decision not to renew, renewal is a matter of contract law, determined by the express terms of the parties’ franchise agreement. Thus, if a franchise agreement provides the franchisee with a fixed term during which it may operate its franchise, the franchisee cannot later claim that it is entitled to more (or, rather, the franchisee can of course make such claim, but it will not find itself in a well-supported position). Alternatively, if the franchise agreement provides a franchisee with a right to renew upon the satisfaction of certain enumerated conditions, and the franchisee so complies, the franchisor will be prohibited from denying the franchisee the right to renew.
As mentioned above, however, certain U.S. states have enacted laws regulating renewal, ranging from limitations on a franchisor’s right to not renew; the process by which a franchisor must comply in order to not renew; and, concessions that the franchisor must make in connection with same. Where applicable, these statutory regulations may supersede the express terms of a franchise agreement.
From a process standpoint, some states impose requirements concerning the minimum notice that must be furnished to a franchisee whom the franchisor has elected not to offer renewal. The particular period of required advance notice varies from state to state, but ranges from 60 days prior to the expiration of the term to a full year prior to the expiration of the term. The intent behind these provisions is to afford the franchisee sufficient time to “wind down” its business operations.
Limitations on a Franchisor’s Right Not to Renew
Notwithstanding the express terms of a franchise agreement, certain state statutes impose limitations on a franchisor’s right not to offer renewal to a franchisee. These statutes require that certain specified conditions be satisfied prior to a franchisor exercising such right. While the particular conditions enumerated in these statutes vary greatly, one common theme that persists among them is the “good cause” pre-requisite. Specifically, the franchise laws of the following states require the franchisor to demonstrate “good cause” in order to refuse to renew the franchise relationship: Arkansas, California, Connecticut, Delaware, Hawaii, Indiana, Iowa, Minnesota, Nebraska, New Jersey, Puerto Rico, the Virgin Islands, and Wisconsin.
Unfortunately for franchisors, there is no single prevailing definition as to what constitutes “good cause,” and determining whether the franchisor has satisfied such prerequisite often requires the franchisor to make subjective analyses as to whether it had a legitimate business reason or the franchisee had failed to comply with material provisions of the franchise agreement. However, the following list includes typical “good cause” statutory triggers for non-renewal: (i) if the franchisee abandoned its franchise; (ii) if the franchisee failed to pay amounts owed within certain time periods enumerated by the particular state; (iii) if a franchisee is convicted of a crime; (iv) if the franchisee files for bankruptcy, makes an assignment (or attempts to make an assignment) for the benefit of creditors, or is otherwise insolvent; (v) if the franchisee fails to substantially comply with the franchise agreement or fails to comply with an essential provision of the franchise agreement; (vi) if the franchisee commits an act that impairs the franchisor’s trademark or brand name; (vii) if the franchisee’s continued operation of the franchised business represents a danger to public health or safety; and/or, (viii) if the franchisor decides to withdraw from the franchisee’s market (importantly, with no intent to capture the franchisee’s business and goodwill itself). However, this list is not exhaustive, and further, whether any or all of these examples are sufficient to satisfy a particular state’s definition of “good cause” requires an analysis of the laws of the particular state at issue.
Required Franchisor Concessions in the Event of Non-Renewal
Even in those instances where a franchisor is not statutorily restricted from failing to renew a franchisee, some states nevertheless require it to offer certain concessions to the franchisee in connection with same. By way of example, in Hawaii, Michigan and Washington, the franchisor must pay the franchisee fair market value, at the time of expiration, for the franchisee’s inventory, supplies, equipment, fixtures, and furnishings if purchased from the franchisor or one of its designated suppliers. Certain states also require the franchisor to compensate the franchisee for the value of its business and/or business assets. In the state of Illinois, for example, if a franchise agreement imposes and the franchisor intends to enforce a non-competition covenant, the franchisor may not refuse to renew a franchise agreement without repurchasing the franchise. The laws of Hawaii and Washington, on the other hand, require the franchisor to pay the franchisee for the loss of goodwill associated with the franchised business if the franchisor is taking over such business upon expiration or did not provide the franchisee with sufficient prior written notice regarding its intent not to renew.
While, as stated above, franchisors are largely free to set the terms governing renewal in their franchise agreements, it is fairly settled case law that where a state statute governs renewal, such state statute will supersede the language of a franchise agreement. Of course, where a particular state has no such statute governing renewal, it is equally settled law that the terms of the parties’ franchise agreement will control.