Franchise Agreements: Renewal and an Orderly Exit

Before franchising your existing business, plan not only for opening but also for the possible end of the relationship. What happens if a franchisee no longer wants to continue, repeatedly breaches the agreement, or cannot agree on a new contract? In franchising, clear and fair exit terms protect the brand, livelihoods and customers.

1. Base the agreement on the relevant law

The Philippines has no single comprehensive franchise law. That does not mean, however, that there are no specific rules to follow. The Civil Code is important for the validity and performance of contracts, while the Intellectual Property Code, or Republic Act No. 8293, governs trademark licensing and use.

There is also Executive Order No. 169, series of 2022, covering franchise agreements involving micro, small and medium-sized enterprises. It sets out the minimum provisions required in agreements within its scope, including duration and renewal, grounds for and consequences of termination, a cooling-off period, and a dispute resolution mechanism. It also directs the Department of Trade and Industry (DTI) to establish a register of franchise agreements.

Ask a lawyer to assess how these rules apply to your franchise offering, and check the current registration procedure with the DTI. Do not confuse business name registration with a review or approval of the agreement.

Nor is there a general obligation to provide a separate, standardised pre-sale disclosure document of the kind required in some other countries. Nevertheless, mandatory contract provisions and prohibitions on fraud remain important. It is incorrect to describe Republic Act No. 9178 as a franchise law; it concerns barangay micro business enterprises, a category of small community-based businesses.

2. Distinguish between expiry, renewal and early termination

These are three different events. Expiry occurs when the agreement reaches its scheduled end date. Renewal means continuing under agreed conditions. Early termination means ending the agreement before its scheduled end date.

For your existing business, start by listing the decisions that need to be put in writing:

• When does the agreement take effect: on signing, on opening, or at another clearly defined point?
• When must the franchisee request renewal, and when must the franchisor respond?
• What criteria must be met: operational compliance, training, or settlement of outstanding debts?
• Are equipment upgrades or premises refurbishments required, and how will these requirements be communicated?
• What happens if the lease on the premises cannot be extended?

Avoid promising automatic renewal if it depends on a fresh assessment. If a new agreement is required, make clear how the new terms will be provided so that the franchisee has enough time to make an informed decision.

3. Establish a fair process for dealing with breaches

Not every mistake should lead to immediate closure. Distinguish between breaches that can be remedied and serious incidents requiring immediate action, in accordance with the agreement and the law.

For example, an incomplete sales report may call for written notice and time to put it right. A food safety risk may require an immediate temporary suspension of the affected activity. A temporary suspension is not automatically the same as final termination of the agreement.

For each type of breach, specify:

1. Grounds: which obligation has not been met, and what evidence is required?
2. Notice: who must receive it, and how will receipt be proved?
3. Remedy: what must be done, and within what reasonable timeframe?
4. Review: who will confirm that the problem has been resolved?
5. Next steps: how will objections or repeated breaches be handled?

The agreement should also cover failures by the franchisor, such as not providing promised support or supplies. A contract is not simply a list of penalties for the franchisee.

4. Plan for an orderly handover and closure

Set out the obligations that will survive termination. These include ceasing use of the brand, removing signage, returning confidential materials and settling outstanding payments. Specify who is responsible for websites and online pages, telephone numbers and customer records, taking data privacy law into account.

Also include provisions for remaining stock, equipment, customer advance payments and unfinished services. Do not promise to buy back all equipment without clear conditions and a valuation method.

Before signing, test the agreement against three scenarios: voluntary exit, non-renewal and a serious breach. Ask your lawyer and manager to identify who will act, which documents will be needed and how customers will be protected.

Practical reminder: Before offering the franchise, you should be able to explain in plain language how it will continue, how problems will be put right and how it can end in an orderly way.