Ending the Franchise Relationship

Virtually every franchise system has problem franchisees. Sometimes the problem is the individual running the franchise. Sometimes the problem is a bad location. Whatever the cause, franchisors are presented with franchisees from time to time that they would like to terminate.

It’s not easy for a franchisor to put an end to a franchise. Regardless of what the franchise agreement says, all franchisees have the right to apply for a court order preventing or delaying the franchisor from terminating the franchise or enforcing whatever security agreement the franchisor may have. In such an application to a court, the franchisee will benefit from being the “little guy” in the dispute.

In order to terminate a problem franchisee, the successful franchisor must plan carefully and execute swiftly. Here’s a franchisor’s hit list:

Know your rights The franchise agreement must be carefully reviewed to ensure that all of the franchisee’s obligations that the franchisor considers to be important are clearly set out. The franchise agreement must also provide specific consequences for failure of the franchisee to observe these obligations; i.e., that franchisor must clearly have the right to terminate the agreement for the default in question.

Build the case It’s important for the franchisor to “build its case” against the problem franchisee. The franchisor should not seek to terminate the agreement on the basis of “minor” breaches. Rather, notices of default should be sent out in connection with each of the breaches in question and a detailed file maintained with respect to all such matters together with particulars of the follow-up by the franchisor in each case. The franchisee should not be able to argue that the franchisor has condoned its conduct.

Follow the letter of the agreement Third, when a major default occurs or when a number of minor defaults have accumulated, the notice of default or termination must be absolutely correct in its content. A proper accounting of any dollar amounts should be set out. All time frames for notice and the method of notice provided for under the franchise agreement should be scrupulously adhered to and, where appropriate, a “belt and suspenders” approach should be taken by providing an extra few days’ notice and by sending copies by a couple of alternate means of delivery.

Reset the clock The franchisor should not allow the franchisee to “muddy the waters”. If deadlines or specific amounts are set out and the franchisee does not comply because an extension or modification has been agreed to, the franchisor needs to “reset the clock” clearly and with specifics of whatever additional requirements remain outstanding. Notes should be made of all conversations, and all communications carefully kept in the file.

Act promptly and firmly Finally, when the decision is made to terminate the franchisee, the decision should be implemented swiftly and with conviction (care must be taken to ensure that all notice periods required by law are clearly observed). You may even be pleasantly surprised to find that your once problematic franchisee is now anxious to cure all outstanding defaults, once he sees that you are prepared to take termination proceedings.

More information. For more information on franchising in Canada, the United States and internationally, please contact Peter Macrae Dillon, head of Siskinds Franchise Law Group. Peter is the author of the annotated Ontario Franchise Disclosure Act and the annotated Alberta Franchises Act and over 30 other publications on the subjects of franchising, licensing and distribution. He is licensed in Ontario and New York. Peter can be contacted at 800-816-9596 ext. 7818 or by email at peter.dillon@siskinds.com. Please visit our website at www.franchiselaw.ca The information contained in this note is for general reference only, and should not be relied upon as constituting legal advice.

peter macrae dillon Siskinds franchise franchisor franchising lawyer attorney Toronto Ontario Canada www.franchiselaw.ca



Ending the Franchise Relationship - To learn more about this author, visit Peter Macrae Dillon's Website.

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