A franchise agreement is a contract between you and a franchisor. Essentially, it lays out the rights and responsibilities that each party has concerning the franchised business. Legally, you must run the company according to the requirements set out by that agreement and the franchise operating manuals when you enter a franchise agreement. A perpetual franchise agreement means that the franchise agreement is ongoing; it may have an automatic renewal within the contract.
Furthermore, as a franchisee, it’s essential to understand what your rights and obligations under the Franchising Code. You should also be aware that a franchise agreement only gives you the freedom to operate the business for the life of the franchise agreement. There is no guarantee for the contract to be renewed unless negotiated explicitly under the agreement.
Franchise agreements follow a document called the Franchising Code of Conduct. This code is a mandatory industry code that sets out the conduct of franchising participants. The code includes:
- disclosure requirements
- a good faith obligation
- a dispute resolution mechanism
- a cooling-off period;
- and procedures for ending a franchise agreement
Perpetual franchise agreements
A perpetual franchise agreement, or contract, is generally one that doesn’t specify an end date and doesn’t confer any rights to terminate the contract. However, it is not always readily apparent whether an agreement is perpetual or whether it has a finite term.
Consider an agreement that specifies an initial term but provides that the contract with automatically renew upon expiry of the initial term unless a party to the deal has given notice of non-renewal before the end of the initial time. A lack of a provision of a non-renewal within the prescribed timeframe means that the agreement will become a perpetual contract when the initial term expires.
Consider whether a perpetual franchise agreement is something suitable for you. The long-term commitment has both benefits and pitfalls, it depends on your circumstances and plans for your new franchise business. Lawpath can assist in reviewing any legal agreement you may be making in the future.
Your agreement
It is crucial to understand that a franchise agreement is a contract between you and your franchisor. You are legally bound by a contract’s terms when the deal is signed. Before you sign a franchise agreement, the franchisor needs to wait at least 14 days before you enter the deal or make a non-refundable payment. Some things to check for in franchise agreements are:
- Whether the franchisor can terminate your agreement without you breaching the contract.
- If you have a right to renew or extend your agreement.
- If you can enter a new deal after the initial term.
- Whether previously made claims are in writing and form a part of the contact.
- If the franchisor will place restrictions on the way you operate the business.
- If quality standards for products or services are required.
- Whether the franchisor is seeking to impose a restraint on your ability to operate a similar business to the franchise after your agreement comes to an end.
- The term of your agreement coincides with any lease agreements
