It is now common practice for parties to consider the consequences in detail when entering into a franchise agreement. Practice shows that people sometimes pay less attention to the end of the agreed term and the situation that then arises. This is often the subject of litigation.
First of all, the question of extension and the entitlement to extension, as well as the conditions under which this may or may not take place, play a role in this connection. If there is no renewal, it may be necessary to cancel in time. Even if there is an extension, this may still require a new agreement to be concluded for reasons of competition law.
Finally, there is also the question of whether or not a franchisee who does not want and/or does not receive an extension can claim compensation for the goodwill of his franchise company. Many franchise agreements contain provisions for interim sales and an obligation to present to the franchisor. By no means all franchise agreements contain arrangements for situations at the end of the term. There are various legal bases on which such compensation may be based, depending on the circumstances, at least if not agreed upon. Especially if there is no agreement to sell the company to the franchisor or a third party, but the franchisor does want to continue the operation, these grounds provide the pillars for a solution.
First of all, tenancy law offers the possibility to claim compensation if the landlord (read franchisor) benefits from the fact that a similar business is operated in the rented property by the former tenant (read franchisee) within one year after the end of the lease agreement. . In principle, however, this arrangement only applies if the lease is terminated. In principle, this entitlement cannot be contracted away. In addition, on the basis of tenancy law, at the end of the lease (and thus franchise agreement) compensation may be claimed under certain circumstances if improvements have been made to the leased property.
In addition, the person who takes over the operation without any compensation may sometimes be unjustly enriched compared to the former franchisee.
Case law also shows that even if there is a regular termination/non-renewal of a continuing performance contract, this can still lead to liability for compensation under certain circumstances on the basis of reasonableness and fairness. This may be the case, for example, if a sound motivation for not wanting to extend further has not been given and/or investments made have not yet been written off. Non-renewal should therefore preferably be properly motivated.
A well-considered arrangement in the franchise agreement itself prevents many such disputes, or at least frames them. Both parties are also advised to timely anticipate the situation of (non-)renewal and/or cancellation, also insofar as it relates to the transfer of the company.
Ludwig & Van Dam franchise attorneys, franchise legal advice