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 away.

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 enforce.

Again, the key is for you to know your rights.

Contact Michael Einbinder at me@ed-lawfirm.com.