The following is an actual situation that was experienced by a major franchisor.
This franchisor's standard franchise agreement provided that its franchisees were to notify it, at least six months before the end of the initial term of their franchise agreement, of their intention to renew, or not, their agreement.
After some discussions about the renewal terms and conditions, one of the largest franchisees of this franchisor notified it, within the prescribed time period, of its decision not to renew its franchise agreement. The franchisee also notified the franchisor of its wish, upon termination of its agreement, to sell the assets of its business to a buyer that was part of a competing chain.
While a six-month deadline might look appropriate on paper, it is a very short time (in fact much too short) to find a new location, recruit a new franchisee, build and equip a new establishment so as not to leave an opening in the market, or worse, fall prey to the competition!
I've also witnessed other situations where, after forwarding their renewal notice, franchisees had a change of heart or did not comply with the agreed-upon renewal terms and conditions (specifically with respect to signing a new, updated agreement or upgrading their franchised establishment) and this only few weeks before the end of the initial term of their agreement.
In order to avoid such very unpleasant surprises, the deadlines, terms, conditions and steps outlined for the purposes of the exercise, by a franchisee, of an option to renew its franchise agreement must take into account several important elements. Among them, the industry in which a franchise network is operating, the size of the franchised establishments as well as the reasonable period of time needed by the franchisor to replace a franchisee whose agreement will not be renewed.
These deadlines, steps and terms and conditions must also be practical and allow the parties (franchisor and franchisee alike) the requisite time to be able to successfully complete them without any undue pressure and, as needed, to take, in a timely manner, any appropriate action in the event of a non-renewal or non-compliance with the renewal terms and conditions.
Thus, for many networks, the appropriate lead time for forwarding a renewal notice could well be twelve, or even eighteen, months prior to the date of the end of the initial term of the agreement. As for the appropriate period of time for fulfilling the main renewal terms (such as executing new updated agreements, and often, signing an agreement for renovating the franchised establishment so that it is up to the standards then being used for other new franchised establishments), a six- to nine-month window before the start date of the renewal period would also often be preferable.
Four practical tips
Automatic renewal is rarely the best option
In order to limit the administrative work required for a renewal and to mitigate the risk of the franchisee forgetting to forward its renewal notice, it may be tempting to simply stipulate that the renewal will be automatic, unless notice to the contrary is given.
In the franchising world, this is rarely the best option.
Indeed, the renewal of a franchise agreement should be subject to certain terms and conditions (such as the franchisee not being in breach) and the renewal process itself must provide for certain steps (such as the signing of a new, updated agreement, the upgrading of the franchised establishment and, often, the execution of a release form).
Let us recall that, in a lengthy ruling handed down on July 28, 2017, in the matter of Uniprix inc. v. Gestion Gosselin et Bérubé inc., the Supreme Court of Canada declared an automatic renewal clause that did not include any limit as to the number of renewals granted to the franchisee to be valid. This resulted in the franchisor being prevented from imposing conditions upon any renewal, and from terminating this franchise agreement, for as long as the franchisee continues to comply with its duties and obligations and wishes to renew every five years.
This ruling should prompt utmost caution on the part of any franchisor seeking to make use of an automatic renewal clause, as well as of any franchisor wishing to stipulate an indeterminate, or unlimited, number of renewals in its agreement.
Hence, if the automatic renewal option is selected, its wording should still ensure compliance with the important terms that may be required by the franchisor for renewal purposes, which renders the drafting of said option significantly more complex.
The renewal terms, conditions, steps and procedures must be very clear, easy to follow and specific
If the agreement is deemed to be a "contract of adhesion" (a standard-form agreement), any doubt as to its interpretation will be resolved to the benefit of the party that contracted the obligation (the franchisee) and against the party that stipulated it (the franchisor).
Clarity in drafting the renewal clauses, as well as the criteria, steps and procedures to follow for a renewal, is therefore extremely important in order to prevent major difficulties.
As mentioned above, one must also ensure that the renewal procedure is practical and provides each party with the time needed to successfully complete, within the timelines stipulated in the agreement, each of the steps required for renewal. As well, the parties must allow themselves, and the franchisee must be given, sufficient time in which to take the required steps in the event of non-renewal or non-compliance with the renewal terms and conditions.
It is preferable that the agreement also clearly stipulates the consequences of any breach of compliance with its renewal terms and conditions
Many franchise agreements stipulate what will occur should the franchisee does not exercise the renewal option. They are, however, strangely silent as to what must happen in the event that, after exercising the renewal option, a franchisee has a change of heart or, even, where it does not comply with the renewal terms and conditions, for instance by refusing to sign a new, updated agreement or to renovate its establishment, for example.
Yet, such situations occur frequently (based on my experience, more often than those instances where a renewal option is not exercised).
It would, therefore, be appropriate to make certain that your agreement clearly describes the consequences applicable in this situation so that you do not find yourself, as is unfortunately too often the case, without an effective response or remedy.
The franchisor must ensure proper compliance with the renewal terms and conditions set out in its agreement
When the time comes to renew a franchisee's franchise agreement, the franchisor must ensure that it is fully aware itself of, and in compliance with, the renewal terms and conditions stipulated in its agreement.
For example, we were recently called upon to act in a situation where the franchise agreement required the execution of a new, updated agreement as an essential condition for its renewal. After having forwarded this new agreement to be signed by its franchisee, the franchisor did not perform the necessary follow-up to ensure that the new agreement had indeed been signed.
Several months later, this franchisor found itself in a very thorny situation when the franchisee notified it of its decision to terminate its franchise relation, since the franchisee's agreement had not been renewed in accordance with the clauses that had been stipulated by the franchisor.
This is merely one example among a host of others illustrating how important it is for any franchisor to make certain that the renewal terms and conditions stipulated in its franchise agreement are clearly met, by both parties, when the time comes to renew.
Obviously, the franchisor and franchisee can always agree at this point to vary these renewal terms and conditions or, even, to waive certain conditions. In such cases, these changes must nevertheless be subject to a specific agreement that has been duly signed by all parties.
Fasken has all the requisite expertise and resources to help you draft agreements that adequately protect your rights and to ensure that they are genuinely suited to your needs.