Walking away from a franchise agreement is a significant decision with substantial legal ramifications. Understanding the consequences can help you make an informed choice. Here, we break down what happens if you decide to leave your franchise and the steps you should consider before taking any action.
Breach of Contract
Most franchise agreements are fixed-term contracts. This means that if you walk away before the term ends, it constitutes a breach of contract. Breaching a franchise agreement can render you liable for contractual damages. The franchisor has the right to seek compensation for any losses incurred due to your premature exit. These damages can be substantial, covering lost profits, costs to find a new franchisee, and other expenses directly related to your breach. Therefore, walking away from a franchise agreement is not as simple as just leaving; it has significant financial implications.
Abandonment and Termination
Walking away from your franchise can also be deemed abandonment. The Franchising Code lists abandonment as one of the special circumstances that entitles a franchisor to terminate the agreement with just seven days’ notice. If they do so, they can still pursue a claim for damages. Abandonment can severely damage your reputation and future business prospects. It demonstrates a disregard for contractual obligations, which can make other potential business partners wary of entering into agreements with you in the future.
Guarantees and Security
If you provided any guarantees or other security for your franchise, the franchisor might rely on these to recover any damages. Personal guarantees, in particular, can be a significant risk. If the franchise agreement included a personal guarantee, the franchisor can pursue you personally for any outstanding debts or damages. This means that your personal assets could be at risk, not just those of your business. Understanding the extent of your liability is crucial before deciding to walk away.
Requesting Termination or Dispute Resolution
A better approach than simply walking away is to issue a request to terminate the agreement in accordance with the Code. If you have valid reasons for wanting to leave, such as misrepresentation or significant changes in circumstances, you might be able to negotiate a termination. Additionally, if there are disputes warranting it, you can issue a dispute notice in accordance with the dispute resolution procedure of the Code. This formal process can help resolve issues and potentially allow for an exit on more favourable terms. Following the proper procedures can help protect your interests and reduce the risk of significant financial and legal repercussions.
Seeking Professional Legal Advice
If you are considering walking away from your franchise, seeking professional legal advice should be your first step. A specialist franchise lawyer can help you understand your rights and obligations, assess the potential risks, and advise on the best course of action. They can also assist in negotiating with the franchisor or representing you in any disputes. Given the complex nature of franchise agreements and the significant potential consequences, professional guidance is invaluable.
Continuing Business as Usual
While seeking advice and planning your exit, it is essential to continue operating your franchise as usual. Complying with the terms of the agreement can help you avoid being issued a breach notice, which can complicate your situation further. Maintaining business operations shows good faith and can also strengthen your position if you enter into negotiations with the franchisor. It demonstrates that you are committed to fulfilling your obligations while seeking a fair resolution.
Conclusion
Walking away from a franchise agreement is not a decision to be taken lightly. The legal and financial ramifications can be severe, including breach of contract, abandonment, reliance on guarantees, and personal liability. Instead of abruptly leaving, consider issuing a request to terminate the agreement or a dispute notice, and always seek professional legal advice. A specialist franchise lawyer can help you navigate the complexities of your franchise agreement and find the best path forward. Meanwhile, continue to operate your business as usual to avoid further complications. By taking these steps, you can better protect your interests and minimize the risks associated with ending your franchise relationship.