Unlike a marriage, a franchise relationship comes up for renewal at the end of its term.  Even if the relationship is a positive one with the franchisor, a franchisee may need to be careful to ensure that, going forward, there are no surprises as it renews its vows.

Under Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000, the franchisor is generally required to provide the franchisee with a franchise disclosure document containing all material facts not less than 14 days before the signing of a new franchise agreement and/or the payment of any fees relating to the renewal term.  Although there is an exception to the disclosure obligation in the Act for a renewal or extension of a franchise agreement, this exception is only applicable if there has been “no material change” since the original franchise agreement was entered into – an unlikely scenario unless the initial term was extremely short.

It is imperative that, prior to signing, a franchisee read the entire franchise disclosure document, including the new franchise agreement and all related documents to be completely satisfied with all terms and conditions, which may differ significantly from those in the existing agreement.  In addition, here are some other factors that a franchisee should consider on renewal:

1. Compliance with Pre-Conditions – It is usually a standard requirement in a franchise agreement that the franchisee notify the franchisor in writing of its intention to renew by a certain date before expiration of the existing term.Failure to comply with this precondition may, at worse, legally permit the franchisor to ignore the renewal request by the franchisee and consider the franchise agreement terminated on the expiration date of the initial term.Even if the franchisor proceeds with the renewal request, failure to meet this precondition may affect negotiations with the franchisor regarding the renewal terms since it may still terminate the franchise agreement if these negotiations become contentious.
2. Lease – Franchisors often prefer the lease term for the franchised location to be closely coordinated with that of any renewal term.Therefore, renewal of the franchise agreement may also mean renewal of the lease and negotiating with the landlord for the rental terms for the premises.
3. Renewal Costs – A fixed renewal fee may be payable by the franchisee as set out in the existing franchise agreement.That said, there may be some additional “hidden” renewal costs that may not be clearly set out but payable by the franchisee. These may include costs to renovate and upgrade the franchise to the franchisor’s current standards for equipment, software, and leaseholds; training costs for the franchisee and its employees and managers; and legal fees incurred by the franchisor to effect the renewal.
4. Territorial Changes – Some franchise agreements permit a franchisor on renewal to adjust boundaries of an exclusive territory serviced by the franchisee.If reduced, this may significantly affect the franchisee’s customer and revenue base, and have an impact on any relocation of the business if necessary.
5. Royalty and Advertising Fees – A franchisee should be alert to whether these fees have increased, and if so, the franchisee may need to consider whether the franchise is still economically viable.
6. Resale Provisions – Although it may seem odd, a franchisee may renew its franchise for the purpose of putting itself in a better position to sell it – that is, renewing its vows to get a better divorce settlement in our analogy.By entrenching its rights to be the franchisee in an exclusive territory for a longer period, the franchisee may be able to obtain a higher selling price from a purchaser.If this is the motivation for the renewal, a franchisee would be well advise to focus upon the resale provisions in the new franchise agreement to ensure that there are no surprises at that time.

The above list of considerations is not exhaustive and each franchisee is well advised to consider their own situation and motivation for any specific terms and conditions to renewing their franchise.

© Morrison Brown Sosnovitch LLP, 2015. All rights reserved.