Avoiding Disaster – Franchise Agreements Terms

Most franchises have a typical term length of either five or ten years meaning at the end of the term, a franchisee will have the option to either renew the franchise agreement or to terminate the franchise and get out. For many franchises, a store front or franchise location is one of the obligations of owning a franchise. Generally, the term of the lease for the franchise location is tied to the term of the franchise. However, in some instances, a poorly drafted franchise agreement can lead to problems for the franchisee at the end of the term when it is time to either sign a new franchise agreement or terminate.

Sometimes, a poorly drafted franchise agreement will state that the term of the franchise agreement begins on the date of execution of the franchise agreement or may state that the term begins on the date that a lease is executed for the franchise location. This is a problem in either scenario because it often takes months, and sometimes over year, to locate a viable space, to secure a lease, and then to complete the build out of the space. Generally, the term of a commercial lease does not commence until the tenant is open for business. Therefore, if the franchise agreement term commenced upon execution or upon the signing of a commercial lease for the franchise’s location, the franchise term is going to be anywhere from a few months to over a year shorter than the lease term. This could mean disaster for a franchisee who may not want to renew the franchise agreement because once the franchise agreement terminates, the franchisee will no longer be able to operate as a franchise but will continue to be liable for rent under the lease for the remainder of its term.

Accordingly, potential franchisees should pay close attention to the length of each franchise term and should ensure that the franchise term is tied exactly to the length of the lease term for the franchisee’s location.