How To Terminate A Franchise Agreement (2025 Updated)

Terminating a Franchise Agreement in 2025 is a significant step, and its consequences should be carefully considered. As a franchisor, it is essential that you understand not only the options available to your franchisee for terminating the agreement, but also the legal pathways available for you to seek termination when necessary.

This article examines the various ways a franchise agreement may be terminated, outlines alternative dispute resolution methods, and explains the key requirements for termination under current 2025 guidelines.

A crucial preliminary point is that both you and your franchisee must act in good faith in all matters arising under your franchise agreement. In line with the latest ACCC guidelines for 2025, parties are expected to exercise their powers reasonably and not arbitrarily or for any irrelevant reason.

A decision will not be in good faith if a party acts with an ulterior motive or deliberately denies the other party the benefits of the contract. This requirement is non-excludable and, under current law, breaches can incur penalties of up to $33,000. This obligation extends to all actions relating to the termination of the franchise agreement.

When Can A Franchisee Terminate A Franchise Agreement?

Franchise agreements may be terminated by the franchisee through several distinct avenues, each of which is highly fact dependent.

Cooling Off Period

The Australian Competition and Consumer Commission’s Franchising Code of Conduct (FCC) continues to allow a franchisee to terminate a franchise agreement within 14 days after signing or after making the initial payment. This cooling off period gives the franchisee a short timeframe in which to reconsider their commitment without incurring significant losses.

Regarding the payment, you may retain a portion of the franchisee’s money only if the agreement expressly permits this for covering ‘reasonable expenses’-which might include training, administrative costs, or other initial expenditures. It is important that these terms are clearly documented in the franchise agreement.

Franchise Agreement Term

Most franchise agreements do not allow for early termination. However, some agreements include a clause that provides the franchisee with an option to terminate under certain circumstances. For instance, in exceptional situations such as government-mandated lockdowns or significant regulatory changes, such a clause may permit early termination.

Franchisees often negotiate for such clauses, so it is imperative to have a specialist lawyer review your agreement before signing. In some cases, you might also negotiate the inclusion of an early termination clause, depending on the nature of your business and the particular circumstances of the franchisee. For additional insights, consider our guide on Legal Documents You Need For Franchising.

Franchisor Breach

If a franchisor breaches the agreement, it does not automatically grant the franchisee the right to terminate. Often, the franchisee will be expected to continue operating the franchise until the agreement expires.

However, where the agreement includes a clause that permits termination on the basis of a breach (for example, in the event of substantially late royalty payments), termination may be pursued after satisfying the clause’s requirements. If such a term is absent, the franchisee must follow the prescribed dispute resolution procedures in the agreement or as directed by the FCC. This method is inherently less certain and relies heavily on the case-specific facts.

When Can A Franchisor Terminate A Franchise Agreement?

Breach By Franchisee

A franchisor cannot terminate an agreement for every isolated breach. In the dynamic business environment of 2025, it is crucial to obtain expert legal advice to determine whether a breach qualifies as fundamental and justifies termination.

This legal consultation should address two key questions:

1. What exactly do the terms of the franchise agreement stipulate?
2. Does the franchisee’s conduct constitute a breach of these terms?

These assessments depend on the precise language of the agreement and the specific circumstances of the alleged breach. A common example is the misuse of the franchisor’s intellectual property; for further guidance, see our resource on protecting your intellectual property. Importantly, the franchisee must always be given a reasonable opportunity to remedy any alleged breach.

The franchisor must:

1. Provide the franchisee with reasonable notice in writing that termination is intended due to the breach;
2. Clearly state what remedy is required to cure the breach;
3. Allow the franchisee a reasonable time-typically up to 30 days, unless a different period is specified within the agreement-to remedy the breach.

If these steps are followed and the specified period expires without remedy, a termination notice may be issued, thereby entitling you to terminate the franchise agreement.

Conversely, if the breach is remedied within the given timeframe, the franchisor cannot proceed with termination on those grounds. Failure to comply with these requirements could result in penalties of up to $54,000, as currently mandated.

No Breach By Franchisee

The franchisor may also have the right to terminate the agreement without any breach by the franchisee, provided that reasonable written notice and justifiable reasons are given. This right, however, is only valid if the franchise agreement explicitly provides for such termination.

Special Circumstances

Under special circumstances, the standard termination procedures-including the requirement for ‘reasonable notice’-may not need to be followed. In 2025, scenarios that may justify immediate termination include:

1. The franchisee no longer holds the licence required to operate the business;
2. Bankruptcy or insolvency;
3. De-registration (in the case of a company);
4. Abandonment of the franchise or franchise relationship;
5. Conviction for a serious offence;
6. Operating the business in a manner that endangers public health or safety;
7. The fraudulent operation of the business.

It is vital that the franchise agreement explicitly allows termination for these reasons in order for them to be enforceable.

Disputes

If a dispute arises over a proposed termination, the matter must be resolved either through the internal dispute resolution process outlined in the franchise agreement or via the FCC’s dispute resolution mechanism. Regardless of the route taken, both you and your franchisee are required to engage collaboratively to resolve the issue.

Successful dispute resolution in 2025 is often achieved when both parties:

• Attend and participate in meetings at mutually convenient times,
• Avoid actions that could damage the reputation of the franchise system,
• Clearly communicate their objectives from the outset, and
• Strictly comply with any applicable confidentiality obligations.

Other Ways To Terminate A Franchise Agreement

Dispute Resolution

As noted above, engaging in the dispute resolution process-whether via the internal mechanism provided in the agreement or through the FCC mandated process-can sometimes lead to a mutual agreement to terminate the franchise. In these cases, the parties may negotiate a settlement that reflects both current market conditions and their respective interests.

Litigation

Litigation remains an option for both franchisors and franchisees looking to bring an agreement to an end. This route may be pursued for various reasons, all of which will depend on the specific circumstances of each case. However, given that litigation in 2025 is generally both expensive and time consuming, it is typically recommended as a last resort.

For example, if either party is involved in misleading or deceptive conduct, this may provide a basis for litigation. Nonetheless, every effort should be made to resolve disputes amicably before resorting to the courts.

Mutual Termination

It is important to note that terminating a franchise agreement does not necessarily have to be contentious. In many cases, your franchisee may have valid reasons for termination that are acceptable to you. Under mutual termination, you might negotiate an exit payment to compensate for lost fees, or even propose to buy back the franchise. This approach, which relies on a mutual understanding, often results in a smoother transition.

Before proceeding with termination, it is advisable to develop a comprehensive exit strategy. This should involve reviewing all operational and financial responsibilities, negotiating a fair exit package, and ensuring that any restraint or intellectual property clauses are fully understood. For additional insights, please consult our articles on Restraint Clauses and our Franchise Agreement Review service.

The Consequences Of Terminating A Franchise Agreement

If termination is executed due to the franchisee’s fault, you may seek a court order for damages amounting to the revenue you would have received had the agreement continued for its full term.

You should also consider binding the franchisee to a restraint of trade clause or restricting their use of intellectual property through specific provisions in the franchise agreement. Such measures help safeguard your business interests and provide additional grounds for legal recourse should the franchisee violate the agreed terms.

Bear in mind that certain breaches of FCC provisions related to termination can incur financial penalties. Under current 2025 regulations, such breaches may result in fines of up to $63,000 per breach. For more details, review the FCC franchising penalties.

Key Takeaways

There are multiple ways in which either you or your franchisee can terminate a franchise agreement, and each method is highly dependent on the specific facts of the case. Given the complexity of the current regulatory landscape, obtaining expert legal advice before initiating termination is strongly recommended.

Including clauses that allow for termination under defined circumstances can provide certainty and protection for franchisors, as franchise agreements are typically drafted to safeguard your interests.

Franchising Resources

Laws around franchising can be complex and require specialised legal expertise. We offer a range of resources to guide you through various stages of the franchising process, including:

• 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
• What To Do With A Bad Franchisee
• Franchisees’ Legal Obligations
• What Are Franchising Royalties
• Franchise Grant Process

Need Help?

Terminating a franchise agreement is a significant decision that requires careful evaluation. The specific facts and context of your situation should be thoroughly examined by a specialist lawyer before proceeding. Remember, the FCC and other regulatory guidelines are continuously updated, making it essential to stay informed of the latest requirements in 2025.

At Sprintlaw, our expert team can help you draft or review your franchise agreement to secure the best outcomes for your business, as well as provide tailored legal advice on termination procedures. Contact us at team@sprintlaw.com.au or call 1800 730 617 for an obligation‑free consultation.

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