Termination Provisions: Do You Know How You Could Lose Your Canadian Franchise?
A franchise agreement is an incredibly important document. This is the contract you’ll sign with the franchisor that contains all the terms and rules of the relationship. While these agreements are governed by Canadian law—and in some cases, provincial law, as outlined by the Association of Corporate Counsel (http://www.acc.com) —you still need to carry out your due diligence to protect yourself. Before you sign anything, here are some termination provisions to watch out for.
Harsh termination terms
Some franchise agreements have termination provisions that are unusually harsh on franchisees. For example, some have a “three strikes and you’re out” clause; if you breach the agreement on at least three occasions over its term, your franchisor can end your agreement even if you cure those breaches. Another example is immediate termination for errors in financial documentation. If you submit a royalty report or another financial disclosure document that has a mistake in it, the franchisor can terminate your agreement even if the error was inadvertent.
Buying a franchise involves a significant investment on your part, so you need to be cautious about termination provisions. If the agreement ends early and you lose the right to operate your franchise, you may not be able to make any profit or even recover your initial investment in the business.
Generally speaking, the franchisor’s ability to end the agreement without your consent should be limited to a situation in which you’ve breached the agreement and failed to cure that breach within the time frame stated in the agreement. This breach of agreement should also relate to something important that you can control.
What you can do
You can negotiate with the franchisor over the agreement to remove provisions you‘re concerned about, but be aware that this may not change anything. Adjusting the provisions is often easier to accomplish. The three-strikes termination clause, for example, could be limited to a period of time instead of the length of the entire agreement. Three breaches over the same 12-month period is far less stringent than three breaches over a ten-year agreement term. For the financial statement error clause, you can ask for it to be limited to errors that are done on purpose or grossly negligent.
If your prospective franchisor won’t budge on an unusually harsh termination provision, you have to really consider whether you can live with that provision. If you can’t, it’s time to look for another brand. Make sure you have an experienced attorney review your franchise agreement before you sign it as these documents can be full of confusing legal terminology that you need to fully understand before proceeding.