Renewal Agreements -- The Ticking Time Bomb
by Michael Einbinder
Is your franchise agreement coming up for renewal?
If it is, in order to continue in business, you will have to sign a new
franchise agreement when your old agreement expires. The renewal provision
of your agreement may be a ticking time bomb. Most agreements state that to
renew, the franchisee has to sign what is referred to as the then current
form of franchise agreement. That is, you will be required to sign the
agreement that your franchisor is making its new franchisees sign.
This new agreement will be substantially different than the one that is
about to expire. The franchise that you have had for ten years will suddenly
be changed and you will be operating under a new and greatly modified
document, and the rights that you had under the old agreement may be taken
For example, franchise agreements that originally appeared to provide for
unlimited renewals may now be limited to one or two renewals, and the term
may be shortened from ten years to five years. Although your old agreement
granted you an exclusive territory, the new agreement may allow the
franchisor to establish new franchises or company-owned units nearby. Or the
new agreement may provide that the franchisor can distribute products in
your territory through alternative channels, such as the Internet or
non-branded retail outlets. Franchisors can also change royalty rates,
advertising contributions and the level of service they are required to
provide to their franchisees.
What can you do?
First, you need to know your rights. Have a professional review your
original franchise agreement and the renewal document. Find out what the
differences between the two are. The original franchise agreement may
provide more rights to you than you know or than the franchisor wants to
acknowledge. In some cases, the old agreement binds the franchisor for
longer than the initial ten-year term. It may not allow the franchisor to
take away territory or encroach on your territory. The key is to know your
rights and to enforce those rights.
One choice for franchisees whose agreements are expiring is to not renew.
If you want to stay in business, the concern here is that your franchise
agreement may have a non-compete clause prohibiting you from operating a
business similar to the franchised business for a period of time after the
franchise agreement has expired. A franchisor may seek to enforce this
clause is it determines that your continued activities in the business are
impacting the franchise system. This contract provision should be reviewed
carefully to determine if it is enforceable. If the imposed limitation is
not reasonable in terms of the duration of the restriction or the
geographical area it covers, it may be difficult for a franchisor to
Again, the key is for you to know your rights.
Contact Michael Einbinder at