Termination of a Franchise Agreement

Multi-Layered Legal Analysis

Termination of a franchise agreement, whether you are dealing with the issue from the franchisor or the franchisee perspective, is a serious and not always straightforward process. Most franchise agreements contain detailed termination procedures, which must always be reviewed and honored. In addition, it is important to consider whether there are existing laws or regulations that could apply to the termination process.

While there is no federal franchise law that specifically addresses termination procedures, there are a number of states that have enacted franchise laws that sometimes directly govern the termination process. As an example, under New Jersey’s Franchise Practices Act, a franchisee must be given at least 60 days prior written notice of the franchisor’s intention to terminate. The 60 day rule must be complied with even if the franchise agreement states that the franchisor need only give some amount of time less than 60 days. In Minnesota, the notice period is 90 days. Other states have varying requirements.

Franchise Agreement Expiration

“Termination” does not just include situations where the franchise agreement is being terminated because of one of the parties breached the agreement. It also includes situations where the Franchise agreement has expired. Some states have laws requiring that the franchisee be given a fair opportunity to renew the franchise relationship. For example, in one state, the franchisor must have a reasonable basis to withhold renewal. In another state, the franchisor must give the franchisee at least 180 days prior notice of its intent not to renew. In short, the franchisee may have more rights with respect to the termination process than what is stated in the Franchise Agreement.

Backlash from Improper Terminations

If the franchisor fails to comply with any state franchise law, the repercussions can be severe. Not only can the franchisor be sanctioned by the state, many states also grant the franchisee a private cause of action against the franchisor for its failure to comply with the law. These laws typically allow the franchisees to collect not only their monetary damages, but also their attorney fees and costs to bring the lawsuit.

Whether you are a franchisor or a franchisee, we can help you navigate through the difficult waters of franchise termination.