Can a franchisor decide not to renew a franchisee’s licence to trade under its brand name?

Shelley Nadler writes:

It’s usually the practice for franchisors to grant a franchisee the right to renew their franchise agreement at the end of the initial term for a further period of years, often referred to as the ‘renewal term’. However, there are usually conditions attached.

If the franchisee doesn’t satisfy the conditions of renewal, a franchisor may refuse to grant a renewal term and in this case the franchisee’s right to operate the business will come to an end on the expiry of the initial term.

It’s usual for the renewal of a franchise agreement to be subject to the franchisee’s material compliance with the terms of the agreement during the initial term. Sometimes this condition of renewal can be drafted more broadly, requiring the franchisee not to have been in breach during the initial term of the franchise agreement.

A franchisor is unlikely to want to renew an agreement with a franchisee who does not perform well or who has been in breach of the franchise agreement. The franchisee must also not be in breach at the time they apply for renewal.

The franchisee may also be required to make significant capital improvements to their business to bring it up to the standard to which a new franchisee would adhere. The requirement may also apply to the purchasing of the latest technology. There may also be a requirement for retraining.

A franchisee will need to comply with these requirements before the franchisor issues a renewal franchise agreement.

Shelley Nadler is a legal director in Bird & Bird’s international franchising team and has many years’ experience of advising on all aspects of franchising.