Franchising and Franchise Agreements: What are the Legal Issues?

What is ‘franchising’?

Franchising is a common business arrangement by which the ‘franchisee’ is authorised to use a firm’s business model and brand for a specific period of time, in return for an initial fee and royalties.

Franchises are usually in the form or a licence granted by the franchisor to the franchisee. The licence allows the franchisee to trade under the trade mark or trade name of the franchisor and to make use of an entire business package. This package will comprise all the necessary elements to establish the franchisee in the business and enable them to run it with continual assistance on a predetermined basis.

What legal steps are required when entering into a franchising agreement?

Various legal steps need to be taken at the outset. This include:

  • Signing a confidentiality agreement
  • Entering into a deposit agreement and paying the required deposit (in some cases, this may be a non-refundable deposit)
  • Entering into a franchise agreement

What is a Franchise Agreement?

A robust franchise agreement will seek to protect the rights and interests of both the franchisee and franchisor, including protection various intellectual property rights. It will also clearly set out the obligations of both parties.

Are there any regulations governing franchising agreements?

There are no specific pieces of legislation in England and Wales governing franchising agreements. However, it is advisable to seek a franchise company which has been accredited by the British Franchise Association, a regulatory body that helps potential franchisees recognise good franchises.

Many franchisors who have various franchise outlets run by different franchisees under their company name have a standard franchise agreement which all franchisees must sign. However, this may not always be the case, so some of the terms of the contract can be individually negotiated between the parties.

What terms should a franchise agreement include?

In a franchise agreement, there should be terms which benefit/protect both the franchisor and franchisee.

The Franchisor

Important terms to protect the franchisor should be included, such as:

  • Terms that enable the franchisor to adequately monitor the performance of the franchisee
  • Terms that protect the franchisor from unfair competition
  • Terms that protect the intellectual property of the franchisor
  • Terms that restrict the franchise regarding the rights that have been granted by the franchisor to the franchisee

The Franchisee

Important terms protecting the franchisor should be included, such as:

  • Terms that deal with the training of the franchisee and their staff
  • Terms that deal with the supply of goods and or services
  • Terms that detail the responsibility for marketing, advertising and promotions
  • Terms that may provide for assistance in finding suitable premises and help to fit out in the premises in the correct manner
  • Terms that detail the provision of management and accounting services

What about intellectual property issues?

In a franchising agreement, there are a number of intellectual property issues in relation to trade names, trade marks, goodwill, copyright and confidential Information. Perhaps the most common issue which will arise is that of trademarks or trade names.

A franchisee will expect to use the franchisor’s own trade marks in their promotional material, websites, etc. This means the franchisor must ensure that the franchisee’s use of these is sufficiently protected and suitably limited in the franchise agreement. It is in the best interests of both parties that they are protected from trade mark by infringement by third parties.

How long should a franchise agreement last?

A franchise agreement should be drafted in such a way that the franchise can exist over a long period of time, if that is what is required. The parties need to negotiate how long it is to last, for instance, is it renewal on expiry of the initial term? And on what terms? Whatever the length, there should be an appropriate system and procedures in place to facilitate things as calculation and payment of management fees, training and so on.

There should always be a termination clause in a franchise agreement. Either party may find that the franchise is not working, and there is no guarantee that the relationship between the franchisor and the franchisee is sustainable for some reason. The parties need to be protected in such a case.

On what grounds could the agreement be terminated?

A franchise agreement should provide for termination on the following grounds:

  • Breach by the franchisor
  • Breach by the franchisee
  • The fixed term of the agreement has ended and the franchisee decides not to renew the agreement
  • The franchisee sells the business and a new franchise is granted to another party
  • Both parties come to a mutual agreement to end the franchise relationship

Appropriate notice periods should be included, and effective exit arrangements covered in the agreement.

For in depth advice on franchising, you should speak with a company and commercial solicitor.