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Franchise Tidbits: Know and Protect Your Franchise Renewal Rights

By Brian A. Loffredo, Esq. Just like any other business owners, franchisees invest a lot of time, energy and money to grow their businesses. However, unlike most non-franchised businesses, franchised businesses have a shelf life.  Most franchise agreements have an initial “term” that expires after five to fifteen years.  As a result, franchisees must be aware, prior to embarking on the franchise journey, whether or not they have the right to renew their franchise, and on what terms.  The failure to understand renewal rights can result in a lot of hard work, time and energy being lost.  Set forth below are some basic questions and answers addressing renewals. Where are my renewal rights found? Renewal rights, if they exist, will be set forth in the franchise agreement.  Typically, renewal provisions have a designated section dedicated to renewals.  However, provisions relating to renewal rights are not always collected in one central location, and can actually be peppered throughout the agreement.  Franchisees should always review their entire franchise agreement to determine if there are any reasons their renewals can be lost. What typically causes the loss of renewal rights? There are several common ways a franchisee may lose his or her renewal rights.  One such way is if a franchisee fails to properly notify the franchisor of the intent to renew.  Most franchise agreements require specific notice periods, within which franchisees must give written notice to renew.  If the notice provisions are not adhered to, the renewal right may disappear automatically.  Another way franchisees can lose their renewal rights is by defaulting on their obligations to the franchisor.  Many franchise agreements explicitly revoke renewal rights if a franchisee suffers one or more defaults, such as the failure to pay royalties on time.  In practice, not all franchisees are denied renewal for failing to strictly adhere to the notice provisions or by suffering a default.  However, the occurrence of one of these events could provide the perfect excuse for a franchisor to dump a troublesome or less-profitable franchisee without cause. Am I entitled to notice when I lose my renewal rights? Franchisors typically are not required to announce to a franchisee when his or her renewal rights have vanished.  Franchise agreements typically state that renewal rights disappear automatically upon the recurrence of a certain event.  Franchisees may not know that his or her renewal rights have vanished until it is too late. If I renew, does my old franchise agreement remain active? Typically, franchisees are required to sign a new franchise agreement upon renewal.  This new franchise agreement may contain terms very different from the franchisee’s old franchise agreement.  Franchisees who have negotiated changes into their old franchise agreements stand to lose those changes when renewal time arrives.  For this reason, it is important to make sure the original franchise agreement preserves any favorable terms agreed to by the franchisor. Does my renewal give me any leverage? The answer to this question depends on many factors. Franchisors may be willing to grant concessions to franchisees who threaten to leave the system, as a means of keeping them happy.  This is especially true if the franchisor needs a presence in the franchisee’s territory, or if the franchisee was particularly profitable.  There are many scenarios where franchisors would prefer to keep franchisees in the system. Do renewal rights cost extra? Typically, renewal rights are included in the original franchise fee. However, in some instances, franchisees are required to pay a fee for renewal. The right to renew is one of the most important rights a franchisee can have.  For this reason, franchisees must be sure to fully understand their renewal rights.  Franchisees who do not understand their rights stand to lose their investment. If you have any questions regarding the content of this article, or any other franchise law matter, please contact Brian Loffredo at 301.575.0345 or by e-mail at bloffredo@offitkurman.com You may also like: