International Law

The End of a Franchise

What happens when a franchisee's term ends? And the franchisor decides not to offer a renewal of the franchise on the then current terms in order to resell the location? This is a problem that the Australian Government is dealing with.

Last August, 2007 Competitive Foods Australia made submissions to the Government regarding franchise renewal, which included the following overview:

1. The law in Australia does not provide any or any adequate protection for tenants and franchisees who lose the goodwill they have built up in their businesses when landlords and franchisors fail to renew their leases and franchise agreements upon expiry.
2. Economic literature in the franchise context has long recognised the problem of franchisor opportunism, in which the franchisor exploits its rights of termination and non-renewal to deprive the franchisee of economic benefits which the franchisee has established in relation to the business and business goodwill.
3. Whilst existing Australian tenancy and franchise law responds to the problems associated with wrongful termination, it does not currently respond to the problem of non-renewal, which can be seen as a form of "passive termination" that does not require any default to have been committed.
4. The problem can be illustrated by the "churn" and "appropriation" cases. In these cases the landlord or franchisor derives a financial benefit from their failure to renew the lease or franchise agreement, by taking advantage of the goodwill built up by the former tenant or franchisee without having to pay for it.
5. A change to the law is needed to solve the problem of non-renewal, and bring it into line with the law relating to termination. This should be done by requiring landlords or franchisors to grant a renewal of an existing lease or franchise agreement unless they have a good faith reason for not renewing the agreement.
6. This solution has a precedent in oil industry legislation in Australia, as well as general franchise regulation in a number of states in the United States.
7. A good faith regime in relation to renewal would strike an appropriate balance between the freedom of landlords and franchisors to run their businesses, and the legitimate interests of tenants and franchisees to have their hard-earned goodwill recognised and protected.

This "solution" is fraught with difficulties, in my opinion.

Although the problem is real, I believe that the correct solution is to have a franchisor's non-compete clause rendered unenforceable if there is renewal.

The franchisee would realize ahead of time that it wasn't going to be renewed and the locational goodwill, as opposed to the brand goodwill, would automatically be transferred to the franchisee operating a new but similar business. It strikes me as a good trade-off.

Full post as published by Misleading Advertising Law on July 15, 2008 (boomark / email).