How to review a franchise agreement (UK): exclusivity, hidden fees, governing law and exit

Do you truly benefit from exclusivity, and are there hidden fees in your franchise agreement? Before you sign, there are three things to look out for: your exclusivity rights, the fees, and the governing law and jurisdiction clause. This page covers each of them, explains why you do not get a cooling-off period, and then looks at how you can exit a franchise agreement once you are in one.

Sole vs exclusive territory rights

The first thing to check is your exclusivity rights. Typically you will want the franchisor to grant you sole and exclusive rights over a territory. The wording matters.

If you only have exclusive rights, instead of sole and exclusive rights, it could be interpreted as meaning that the franchisor still has the right to compete with you in that territory. "Exclusive" keeps other franchisees out; "sole and exclusive" keeps the franchisor out as well. If the agreement only says "exclusive", ask for it to be changed before you sign. The whole commercial case for paying franchise fees is that you get a protected patch to build up, so this is not a drafting nicety; it goes to the value of what you are buying.

Hidden fees when you sell your franchise

The second thing to review is fees. One of the most common hidden fees you find in a franchise agreement relates to the sale of your franchise business.

Typically you sign up for five years. You may be three years into the contract and want to exit by selling your franchise business to someone else. It is not uncommon to find clauses in the franchise agreement stating that the franchisor is entitled to keep a portion of the sale price of your franchise business. That is money coming straight out of your exit, and most franchisees do not notice the clause until they come to sell. Look for it now, understand what the franchisor would take, and negotiate it if you can.

Governing law and jurisdiction clauses

The third thing is the governing law and jurisdiction clause. Your franchise agreement should specify which courts and which laws prevail. Ideally you want these to be your national laws and courts. If you are based in England, you want English law and English courts to have jurisdiction.

If that is not the case, and the agreement is governed by, say, US law with US courts, then in the event of a dispute things complicate quickly. You would need to appoint a US lawyer and possibly travel to the US to attend court. With an overseas franchisor this clause is easy to overlook and expensive to get wrong. It usually sits at the back of the agreement among the boilerplate, which is exactly why it gets missed.

No cooling-off period for franchisees

Franchise agreements are complex documents, and these three points are a quick summary of the key things to look for. There is no substitute for having the whole agreement reviewed professionally, and there is a particular reason why.

When you enter a franchise agreement you are not entering it as a consumer with a right to cool off and walk away. You are seen as a business that has all the information available to it and understands the contract it is signing. Once you have signed, you are bound. That is why the review has to happen before signature, not after. In my experience franchisees often come for advice after signing, when the options are far narrower than they would have been a week earlier.

How to exit a franchise agreement

Having signed, how can you exit a franchise agreement? Typically there are two main ways: termination for convenience and termination for cause.

• Termination for convenience. Look at the contract and determine whether there is any way to terminate simply by giving notice, without needing a reason. Typically this is not the case in a franchise agreement. Franchisors want franchisees locked in for the term, and the fees they charge are priced on that basis, so a free exit is rarely on offer.
• Termination for cause. This is where you terminate because the franchisor has breached the franchise agreement. Examples include the franchisor not properly marketing your business, or the franchisor not giving you the training it promised. If the franchisor is in breach, the agreement may give you the right to bring it to an end.

Before taking any legal action, whether that is trying to get out of a franchise agreement or deciding whether to sign one, make sure you seek independent legal advice. Termination for cause in particular has to be handled carefully, because getting it wrong can leave you in breach yourself. If you believe you have suffered a breach of contract, I explain the remedies available to you in breach of contract remedies.

Next steps

Before signing, read the territory clause for the words "sole and exclusive", read the sale and transfer provisions for any share of the sale price going to the franchisor, and read the governing law clause to check it points to your own country's law and courts. Then have a commercial solicitor review the full agreement, because once you sign you will be treated as a business that knew exactly what it was agreeing to.