The legal relationship between franchisor and franchisee is, at its most basic level, governed by the terms of the franchise agreement. For example, the legal rights that the franchise agreement grants to a franchisee as to the initial term of the franchise agreement and the franchisee’s rights to renew the franchise agreement are expressly defined in the franchise agreement itself. However, certain states have passed “franchise relationship laws” which provide enhanced protections to franchisees and, in certain instances, require franchisees to be afforded certain renewal rights and certain rights in the event of a franchisors termination of a franchise relationship. As a franchisor you need to be aware of franchise relationship laws and the fact that in certain states franchisees may possess rights that go beyond the written terms of your franchise agreement.
The purpose of this article is not to address each franchise relationship law but, rather, to expose franchisors to an understanding that when it comes time to deal with the termination of a franchised outlet or location or the renewal of a franchise relationship, that you need to evaluate the applicable state law designated in your franchise agreement and the state franchise laws that may or may not exist in the state(s) where your franchisee is located and resides. When evaluating these relationship laws issues arise as to how extensive are the renewal rights granted to franchisees and whether or not state franchise laws essentially render a franchise agreement as perpetual agreements with ever renewable terms, i.e., a perpetual agreement.
In the franchise relationship, some state laws require good cause for the termination and/or non-renewal of a franchise. Some people assert that when read literally and strictly, these laws turn the franchise relationship into a perpetual relationship, because only an intervening breach can give good cause for the termination of a franchise. Often times this is referred to as the perpetual agreement issue.
From the perspective of a franchisee, franchise relationship laws are viewed as a necessary component to preserving the good will associated with the franchised business and outlet that they have invested in. If you are a franchisee faced with issues of where your franchise agreement is terminated or where you cannot renew your franchise, you need to be aware that your legal rights may go beyond the terms of your franchise agreement. State franchise relationship law may afford you the right to maintain and renew your franchise.
From a franchisor perspective, terminating a franchise location or outlet involves more than just asserting rights under your franchise agreement. You must evaluate the state where the franchisee is located, where the franchisee resides and the state law applied by your franchise agreement. If a state franchise relationship law is triggered, you must ensure compliance with the statute. For example you may be required to grant your franchisee an additional opportunity to cure a default or to renew the franchise agreement. Inadvertently triggering the violation of a state franchise relationship law is unnecessary and could prove costly. Franchisors need to be aware of the issue of perpetual franchise agreements.
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