Recently I attended an American Bar Association (ABA) webinar on franchise renewals. Here are some of my take-aways from the webinar and a re-visiting of some basic renewal concepts.
In the franchise world, franchisees and franchisors enter into a franchise agreement for a set time (the initial term). Generally, after the initial term, the franchise agreement provides that the agreement may be renewed if enumerated conditions are met.
Commonly, one condition to renewal is the notice requirement. The franchisee is required to give notice to the franchisor of their desire to renew the franchise agreement. The franchisor may also be required to give notice to the franchisee, if the franchisor does not intend to renew the franchise agreement.
The notice requirement under the franchise agreement is important and should be strictly enforced. Here is why:
- Timely notice can lead to the timely signing of a new agreement or the winding down of the franchised business. Typically, notice per the language of the franchise agreement, must be given 1 ½ to 2 years in advance. If franchisors and franchisees begin to look toward renewal or winding down 1 ½ to 2 years in advance of the initial franchise agreement expiration (Expiration Date), it is more likely that a new agreement will be signed or the franchised business will be prepared to cease operations when the Expiration Date comes.
- Franchisors cannot decline to renew a franchisee without proper notice. If you are working with a franchisee that does not meet the requirements for renewal of the franchise agreement, under state law you may not be able to decline renewal of the franchise agreement without proper notice to the franchisee.
- Failure to give notice can result in extinguishment of renewal rights. Courts are comfortable and willing to honor notice requirements and time limits. The legal system is filled with notice requirements. There is a time limit to file a personal injury case, file an appeal of a guilty verdict, and file an affirmative defense. Courts enforce time limits. There is one caveat. If you do not in practice enforce notice deadlines, do not expect the court to enforce the notice requirement. Notice requirements must be entrenched in your regular renewal protocol to be enforceable.