All franchise agreements have different terms. What works well in one system may not be appropriate in another. The term and renewal provisions of the franchise agreement set forth the length of the relationship. There are advantages and drawbacks to an agreement of any length, which we will discuss here, along with some commonly asked questions.
What Is The Typical Length Of A Franchise Agreement?
The typical length of a franchise agreement is between five and 20 years. A common reason for this general length of time is often the size of the franchisee’s initial investment, though market conditions and the type of franchise can also be factors.
Insights On Agreements, Leases And Timing
Say you are the franchisee of a brick-and-mortar franchise. Your lease will ideally run concurrently with the franchise agreement. Otherwise, should the term of your franchise agreement end before your lease expires, you will find yourself still paying rent (and be contractually obligated to pay that rent) on space even though you no longer have the right to operate the franchise it once housed. Alternatively, if the lease ends before your franchise agreement, you will be obligated to operate a franchise for which you have no location.
Getting the timing right can be challenging. Assume, for example, that you sign a franchise agreement with a 10-year term. The franchise agreement is typically signed first, and then the franchisee scouts a commercial space to rent. But it can take months or even a year to sign a lease. A landlord may want a 10-year lease while you are already nearing the end of the first year on your franchise agreement.
The franchisor will ideally accommodate the request to extend your rights, but that may come with a cost. Franchisees will benefit from hiring a lawyer in this scenario to help communicate and negotiate with the franchisor and/or landlord. Otherwise, you will find yourself in a situation with a lease for a storefront but no right to operate your business.
What To Expect When Renewing Franchise Rights
If you intend to renew your franchise rights after the first term expires, you will likely be required to execute the franchisor’s new form of franchise agreement for the next term. This new agreement will likely have different terms, such as an increased royalty or new fees, and will change the regular expenses of your business.
Early Termination
Sometimes a franchisee will want to terminate the franchise relationship before the end of the term. While it may be a natural disaster or tragedy causing the franchisee to want to exit the business, the reasons could be purely economic, as well. For example, if the franchisee finds that mid-way through a 10-year term, the business is simply not generating the expected revenues he or she may want to close the business. Of course, if the franchisee wants to move or retire and the business is successful, the business could be sold, but even that carries costs.
Whatever the reason, it is important to review the franchise agreement prior to closing the franchise. Typically, the franchisee will not have a contractual right to terminate the agreement before the end of the term. In those situations, the franchisee may be required to pay liquidated damages or lost profits to the franchisor.
Contact Lusthaus Law
Franchisees should consult legal counsel before signing or renewing a franchise agreement or lease. The attorney will review the agreement, explain the franchisee’s risks and options and help to develop an appropriate exit strategy.
If you are considering buying, renewing or selling your franchise, contactLusthaus Law to help you through the process, from beginning to end.
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Franchise agreements are intricate legal contracts that define the relationship between a franchisor and a franchisee. My expertise in franchise law stems from years of hands-on experience and a deep understanding of the complexities involved.
Regarding the concepts within the provided article:
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Franchise Agreement Length:
- These agreements typically span between five to 20 years. This duration is influenced by various factors such as the initial investment by the franchisee, market conditions, and the nature of the franchise itself.
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Alignment of Lease and Franchise Agreement Terms:
- It's crucial for the lease term to align with the franchise agreement. If they don't coincide, issues arise, like paying rent for a space without the right to operate the franchise or running a franchise without a location due to an expired lease.
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Timing Challenges:
- A common challenge is synchronizing the franchise agreement signing with securing a commercial space. Delays in lease signing might clash with the franchise agreement's timeline, necessitating negotiation between the franchisee, franchisor, and landlord.
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Renewal Process:
- When renewing franchise rights, franchisees typically sign a new agreement with altered terms, possibly including increased royalties or new fees. This can significantly impact business expenses.
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Early Termination:
- Exiting a franchise before the agreement's end is complex. Reasons vary from financial difficulties to unexpected circ*mstances. Franchisees often lack contractual rights for early termination, potentially leading to penalties like paying liquidated damages or lost profits.
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Legal Counsel Importance:
- Franchisees greatly benefit from legal counsel. Lawyers help review agreements, elucidate risks and options, and craft exit strategies. Lusthaus Law, mentioned in the article, offers services for those considering buying, renewing, or selling a franchise.
Franchise agreements are legally binding and nuanced, making legal advice indispensable. Whether for lease alignment, renewal negotiations, or early termination concerns, legal counsel aids in navigating these intricacies to protect the interests of both parties involved.
