Franchising can benefit both the franchisor and the franchisee. For the franchisor, franchising means fast business growth, higher visibility, and more profit. For the franchisee, they can step into an already established brand, having a clear plan on how to run the business.
In this article, we’ll run through the franchisor’s obligations to extend a term, as well as look at what franchisees can do as the end of a franchise term nears.
What Is A Franchise Term? Why Would It Be Extended?
A Franchise Term sets out how long the Franchise Agreement will operate for, as they normally run for a set amount of time. Both franchisors and franchisees will understandably want to extend the franchise term if business is going well.
If for any particular reason either party wants to end the Franchise Agreement, they can choose not to renew the franchise term, or to terminate the franchise agreement.
What Do You Need To Do To Extend A Franchise Term?
Before a franchise term ends, a franchisor must do the following:
- Let franchisees know whether they will extend the franchise or begin a new franchise agreement. This is called an ‘end of term notice’.
- At least 6 months notice must be given, or if an agreement has only been in place for 6 months, at least 1 months notice must be given.
- When extending the franchise, an end of term notice must also disclose that the franchisee can have a copy of the disclosure document.
You can read more in general about what documents franchisors need from the beginning here.
What Are Disclosure Obligations?
You would have given a disclosure document to the franchisee at the beginning of your relationship. But what you may not know is, as a franchisor, you must also renew and maintain this disclosure document. Franchisees have a right to access a current disclosure document before renewing or extending their franchise agreement with you. Franchisees can ask for a disclosure document every year.
A disclosure document should include;
- Information on legal proceedings against the franchisor
- Whether the franchisee is able to extend, renew or enter into a new agreement when the franchise agreement reaches its term
- Fees the franchisee may have to pay
- Financial details
- Contact details of franchisees, past and present
Other Disclosure Obligations Franchisors Need To Comply With
According to the Franchising Code, there are additional mandatory disclosure requirements.
As well as providing the disclosure document:
- Franchisors should get written confirmation from franchisees confirming they comprehend the disclosure document.
- Franchisors should give the franchisee a new copy of the franchise agreement, and
- Franchisors should give franchisees a copy of the Franchise Code.
What Happens If Franchisors Don’t Comply With The Code?
If franchisors don’t do the above, the ACCC can take enforcement action. A recent example of this involves popular franchisor Bob Jane. Bob Jane did not give written notice to franchisees whether they meant to extend the franchise agreement or begin new franchise agreements within the cut off time.
Bob Jane also did not provide the necessary documentation under the code before extending agreements, and did not get written statements from franchisees. In this case, Bob Jane must now run a compliance program and is under a court-enforceable undertaking to observe the Franchise Code.
Laws around franchising can be quite dense, and it is an area of law that requires expert legal help. We have a number of resources to guide you in various stages of the franchising process, such as:
- Selling A Franchise
- What To Do At The End Of A Franchise
- Legal Documents You Need For Franchising
- Franchise Agreements
- What Fees The Franchisee Has To Pay
- Terminating A Franchise Agreement
- What To Do With A Bad Franchisee
- Franchisees’ Legal Obligations
- What Are Franchising Royalties?
- Franchise Grant Process
If you are a franchisor, make sure you comply with the Franchise Code and provide the disclosure documents and get written confirmation from your franchisees that they understand your disclosure documents. It’s imperative you stay organised and submit and obtain paperwork by the deadlines according to the Franchise Code.
If you are a franchisee, remember you can request disclosure documents every 12 months and don’t need to wait for the franchisor to take the initiative.
If you are a franchisor or franchisee and need help understanding your obligations, don’t hesitate to reach out to us on 1800 730 617 or by email at firstname.lastname@example.org. We specialise in franchise law and can talk you through your situation.
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