Franchising · 24 July 2018

My franchisor is not generating enough leads for me – can I terminate the agreement?

Franchise agreement
What rights does your franchise agreement give you?

If your franchisor is not fulfilling its obligations to you as a franchisee, you may be looking for a way out. But unless your franchise agreement explicitly allows for an early termination of contract, what rights do you really have?

Based on the information given by one reader looking to terminate their franchise agreement, Grid Law founder David Walker reviews the contract and lays the options out onto the table.

Question

I signed up to a franchise agreement in November 2017 which has a 12-month initial term.

I’m paying £95 per week and am struggling to make these payments. I missed last week’s payment and the franchisor is now chasing me for payment.

My personal circumstances have also changed. I’ve separated from my partner and am living on my own with a 4-year old child and more bills to pay. I had intended to give up my day job (and even handed in my notice) to concentrate on the franchise business but have been unable to do so as the money I earn from it is not enough.

I feel the franchisor is not fulfilling their obligations to me as I’m not receiving enough leads from them. As a result, I’ve had to go back to full time employment to cover all of my living expenses.

The franchisor has offered me a settlement figure to end the contract early but I cannot afford to pay this.

I would really appreciate any help and advice you can give me.

Answer

Thanks for your question. Your basic position is this.

On 20 November 2017 you signed up to the franchise agreement for a 1-year minimum term. You therefore have 18 weeks left before this minimum term expires.

After reviewing the terms of the contract, there is no right for you to terminate the agreement early. Your only option is to give notice so that the agreement ends at the end of the minimum term. (If you miss the notice date the agreement will automatically renew for another year and you will be legally bound to continue paying the franchise fee.)

The contract doesn’t even give you the right to terminate early if the franchisor is in material breach of the agreement. However, if they were in material breach of the agreement and that breach of contract made it very difficult or impossible for you to continue working with them, it would be unlikely that the court would prevent you from terminating the agreement.

Take a look back at David’s franchising features:

You think the franchisor is in breach of contract by not providing you with enough new leads to make this business profitable. Unfortunately, the contract doesn’t guarantee you any level of new business.

Whilst their website says “[The franchisor] also provides pre-paid customers for franchisees” they don’t give any indication how many.

You also have to be available to take the leads which could be difficult if you are working full time alongside this business.

Interestingly, this franchise agreement doesn’t contain an “entire agreement” clause so if you were told by the franchisor that you would receive a minimum number of new leads, this could be legally binding. (For more information on this, please see my previous article “Are statements made during contract negotiations legally binding?”)

You have to remember that as a franchisee, you are running your own business and therefore it’s your responsibility to make it a success. However, the franchisor should be providing you with guidance to assist with the development of your business.

Have you spoken to them about ways to generate new work? If not, I recommend you do this.

I appreciate you are working full time alongside this business and time is therefore short, but could you find any more time to dedicate to this business?

Even if the franchisor is doing very little to assist you with your business, I don’t think this would be serious enough for you to terminate the contract. As I said above, this is your business so it should be you who is generating the majority of the new work.

The fact they are undertaking national advertising and promoting the brand should be sufficient for them to show they have fulfilled their obligations under the contract.

It appears from the exchanges of emails you have had with the franchisor that they will allow you to terminate the agreement early. They have offered you a settlement figure of £2,000.

The franchise fee is £95.00 and there are additional admin fees should you miss any of the payments. (As you missed last week’s payment you are now liable for these.)

With 18 weeks left to go, the franchise fees for the remainder of the initial term are £1,710. In addition to this you still have to pay last weeks missed payment, a £5 per week charge if you fall into arrears and a £75 payment for early termination.

Adding all of this up, you will be very close to the £2,000 early termination fee they have offered you.

So, what are your options?

If you pay this fee the contract will end and you will have no other obligations towards each other.

If you can’t afford to pay this fee you could try to negotiate a lower fee that you can afford or try to agree a payment plan to cover repayment of the debt. The terms of the contract were clear when you signed up and there doesn’t appear to be any breach of contract on their part so you will be relying on their goodwill to reduce the payment.

However, if the franchisor can mitigate their losses they should pass any savings on to you.

If the franchisor won’t negotiate and you don’t pay, they will have the right to take legal action against you. From what I have seen, it’s almost certain that they would win and with added court costs you will end up paying even more than the settlement figure offered. (The court fee on a £2,000 claim will be £115, plus there may be a small amount of interest and other recovery costs.)

If the franchisor takes legal action and wins, you will have a County Court Judgement against your name and this could affect your credit rating. This will then affect your ability to obtain loans or a mortgage in the future.

Instead of terminating the agreement, could you continue for the remainder of the initial term and try to earn something from this business? This would then offset at least some the payments you need to make.

I’m sorry that I can’t offer you a quick and easy way out of this agreement. If you have any further questions, please feel free to email me again.

Kind regards

David

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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