Franchise Agreement Termination and Renewal
A commercial franchise is a contract usually entered into between two contracting parties, the franchisor and franchisee. Just like any other contract, it may be terminated at the end of the contract period, when there is a material breach, of if the parties decline to renew the franchise.
Franchise Agreement Termination
A standard franchise agreement often provides for a certain period when the contract will end. Most commercial franchises have an initial term of 10 to 20 years, while some can be as short as 3 years. The Saudi Franchise Law provides for the right to renew the franchise, but the effect of the franchise’s expiration may differ in some cases depending on the stipulations. In rare instances, the parties agree to continue the franchise on a month-to-month basis after the period lapses. That is, until they decide to either formally terminate or renew the same.
Breach of Contract
Typically, franchises have a termination clause which provides either party to either suspend or terminate the agreement in the event of material breach. A material breach happens when a party fails to comply with a provision which is a major consideration why the other party agreed to enter into the contract. Some examples of material breach are:
Breach of contract by franchisee:
- Conviction of a crime
- forfeiture of a license or lease
- Failure to pay royalties
- Failure to rectify defaults upon notice
- Failure to comply with the franchisor’s requirement as to location or appearance
- Failure to comply with business operation standards
Breach of contract by franchisor:
- Failure to provide training and support
- Fraud or misrepresentation regarding potential profits
- Failure to protect franchisees exclusive rights to a territory
Franchise Agreement Renewal
In the absence of any statutory or contractual protection, the benefit of renewing a franchise could be one-sided and exercised only by the franchisor. In many cases, this action is done for the franchisor’s own benefit without regard for the future of the franchisee. Some of the questionable reasons why a franchisor would not want to renew the contract include:
- Taking over the territory and business opportunity for itself
- Consolidation of the multiple franchise locations
- Transfer of the territory and opportunity to a more favored person
To prevent the above-mentioned unfair practices, the Saudi Arabia Franchise Law provides franchisees protection from unscrupulous franchisors. Article 18 of the law provides that a franchisor may not terminate a Franchise Agreement before the end of its term without the Franchisee’s written consent except for a legitimate cause. It further enumerates situations that may be considered legitimate causes.
Further, Article 15 provides that unless stipulated otherwise, and in very limited cases including the presence of a legitimate cause, a franchisee may opt to renew or extend the franchise. All a franchisee needs to do is submit to the franchisor a 180-day notice. After which, the franchise agreement will be renewed or extended for the same period and on the same conditions as the original agreement.
Finally, the law itself imposes an obligation on the part of the franchisor to refrain, throughout the term of the Franchise Agreement, from establishing any business that undertakes the same activities as the franchise business within the geographical area defined in the franchise agreement, if any, or grant the right to a third party to establish such business.
Before entering a commercial franchise it is best that you know your rights and what possible loopholes the contract may have against your interest either as a franchisor or a franchisee. The lapse of the period of the contract may have various effects depending on its provisions. Keep in mind that while the law makes contract renewal always available on the part of the franchisee, it may nonetheless be stipulated otherwise.