Buying a franchise: check your right to renew

Most people buying a franchise intend to run their business for longer than a single contract term. Yet a good working relationship does not automatically mean you can continue using the franchise system afterwards. Clear arrangements for renewal are therefore important across the franchise sector. Before signing, establish whether you actually have a right to renew, what conditions apply and who decides how much you will need to reinvest.

1. Distinguish a right to renew from an intention to discuss it

Buying a franchise usually gives you the right to use a franchise system for a limited period. The term is set out in the franchise agreement. What happens afterwards depends, among other things, on the renewal provisions: automatic renewal, an option you can exercise yourself, or a new agreement requiring both parties to consent again.

These arrangements do not offer the same level of certainty. A clause stating that ‘the parties will discuss renewal in good time’ does not, in itself, give you an enforceable right to another contract term. Similarly, ‘renewal subject to satisfactory performance’ leaves considerable room for disagreement if satisfactory performance is not defined.

Ask the franchisor for clear answers to three questions:

• Do you have a right to renew, or merely the opportunity to apply?
• In precisely what circumstances can renewal be refused?
• Will the existing terms continue to apply, or must you accept a new contract?

Have a specialist franchise solicitor review the entire clause, including references to schedules and the operations manual. Even an apparently clear renewal option may offer little certainty if another provision allows the franchisor to impose additional conditions at its own discretion.

2. Check that the conditions can be objectively verified

Renewal may depend on meeting payment obligations, quality standards or training requirements. Check whether you can establish in advance what you need to do to comply. A measurable condition is easier to assess than a general requirement to ‘make a sufficient contribution to the image of the franchise system’.

Where performance conditions apply, ask which period will be assessed, what data will be used and who will carry out the assessment. Also discuss how exceptional circumstances will be taken into account, such as prolonged roadworks outside your premises or supply problems beyond your control.

Next, establish whether any breach could prevent renewal. A minor administrative error that has already been corrected is different from persistent payment arrears. Ask for a procedure under which the franchisor must notify you promptly of any alleged breaches and, where appropriate, give you an opportunity to put them right.

Also set out in writing how disagreements over the assessment will be handled. A verbal assurance that ‘we will work it out together’ offers little protection when your next contract term depends on it.

3. Establish the cost of renewal

A right to renew may be less financially attractive than it appears. It might apply only if you pay another fee, replace your fixtures and fittings or sign the standard agreement in force at that time. These requirements are not necessarily unreasonable, but you need to be able to assess their implications before buying.

Ask which costs or investments may arise again on renewal. Distinguish between amounts that are already fixed, amounts calculated using an agreed method and obligations whose financial scale is still unknown.

A useful question to ask is: can I renew without having to accept commercial terms that are not yet known? If the answer is no, do not treat the next contract term as guaranteed in your business plan.

The Netherlands has a specific legal framework for franchising: the Dutch Franchise Act, incorporated into Book 7, Title 16 of the Dutch Civil Code on 1 January 2021. Among other things, it regulates pre-contractual disclosure and requires both parties to act as a good franchisor and a good franchisee respectively. However, it does not provide a general, automatic right to renew a franchise agreement.

Before the agreement is entered into, the franchisor must provide, among other things, the draft contract with its schedules and information about relevant financial obligations. Use that information to assess the renewal provisions. Obtain a separate legal assessment of the statutory rules that apply to any new investment requirements or changes to the franchise system; a contractual renewal condition does not, by itself, resolve that legal question.

4. Map out the decision deadlines before buying

A right to renew is of little use if you miss the application deadline. Identify all relevant deadlines: when must you apply, when must the franchisor respond and by what point must any new terms be disclosed?

Bring these together in a single timetable, identifying the person responsible for each step and the required method of communication. Check, for example, whether an email is sufficient or whether the contract requires a registered letter. Keep proof of receipt.

Also ask what happens if the franchisor fails to respond on time. Do not assume that silence means consent unless the contract provides for this. If necessary, negotiate a clear response deadline and a procedure for dealing with delays.

Practical conclusion: do not buy on the assumption that renewal is standard practice. Make sure your rights, the assessment criteria, potential costs and deadlines are clearly set out in writing before you sign.