Renewing a Franchise Agreement: What to Plan in Advance

When turning an established business into a franchise, it is easy to focus on the first opening and forget that the agreement will eventually expire. Renewal tests the strength of the franchise relationship: the franchisee has already invested in premises and a team, while the franchisor must ensure continuity in the right to use the brand. The renewal process should therefore be designed before the first franchise is sold, rather than after the first notice of expiry arrives.

1. Distinguish between the agreement’s term and the right to a new agreement

In Russia, commercial concession arrangements — the legal framework used for franchising — are governed by Chapter 54 of the Russian Civil Code. Article 1027 allows an agreement to be concluded for a fixed term or without a specified end date. If you choose a fixed-term agreement, decide in advance how the parties will proceed as it approaches expiry.

Article 1035 of the Russian Civil Code gives a franchisee that has duly fulfilled its obligations the right to enter into an agreement for a new term. The terms of the new agreement may be changed by mutual agreement. This does not mean that the existing royalty rate, territory or support package must automatically remain unchanged. Equally, renewal cannot be treated as a decision entirely at the franchisor’s discretion.

Refusing to enter into an agreement for a new term may have statutory consequences if the rights holder subsequently grants similar rights to another party in the same territory. A clause stating that ‘the franchisor may refuse without giving reasons’ should therefore not be regarded as reliable protection: any specific refusal should be reviewed with a lawyer under Article 1035.

Address three separate questions in the agreement:

• when the current term ends;
• how the franchisee gives notice of its wish to continue;
• which document will formalise the ongoing relationship.

Do not confuse extending the term through a supplementary agreement, entering into a new agreement and continuing to operate without formal documentation. These situations may have different legal consequences.

2. Set up a renewal calendar and a clear review process

Appoint a member of staff to oversee renewals and record all agreements in a central register. Each entry should include the expiry date, notice deadline, person responsible for negotiations, document status and registration details for the rights granted. The calendar should flag upcoming decisions early enough for the parties to agree terms and complete the necessary formalities.

Preparation can usefully be divided into stages:

1. Ask the franchisee whether it intends to continue the relationship.
2. Review compliance with the current agreement.
3. Discuss changes to the terms and any investment required.
4. Prepare and sign the documents.
5. Complete any required registration procedures.

The compliance review should be based on records, not a manager’s personal opinion. Gather information on payments, quality inspection results, corrective actions completed and unresolved claims. Separately identify breaches that have already been remedied and matters on which the parties disagree.

Do not treat an internal scorecard as a substitute for the law. A poor assessment of a territory’s prospects does not, in itself, mean that the franchisee has failed to fulfil its contractual obligations. If the franchisor considers a breach grounds for refusal, its significance and the supporting evidence must be assessed.

It is helpful to send the franchisee a final list of concerns and give it an opportunity to respond. This can uncover record-keeping errors before they escalate into a dispute.

3. Agree the financial terms for the next period separately

Renewal often coincides with the need to replace equipment, refurbish premises or move to new software. These costs should not be hidden behind a general requirement to ‘operate in accordance with current standards’. The franchisee needs a specific list of changes, deadlines and clarity on who will pay for each item.

Prepare a table comparing current and proposed terms. Include royalties, other fees, territory, the permitted number of outlets, support and mandatory investment. State the effective date of each change. This makes it easier to assess the overall financial burden rather than discuss each cost in isolation.

If a separate renewal fee is proposed, its basis and amount must be expressly agreed. A further initial franchise fee does not become payable automatically simply because the original term is ending. Explain which rights and obligations are associated with the new payment, and remove any ambiguity from the contractual wording.

For example, the franchisee may need to replace equipment while the franchisor wants to introduce an updated service format. Rather than requiring everything to happen at once, the parties can agree a phased timetable. That timetable should form part of the contractual documentation, not remain a promise in correspondence.

4. Check continuity of rights and the required formalities

Before signing, check the trade mark’s protection period, the identity of the rights holder and the scope of the rights being granted. Renewing the agreement does not automatically renew trade mark protection. If that protection is nearing expiry, the franchisor must arrange its renewal separately and check the progress of the relevant procedures.

Under Article 1028 of the Russian Civil Code, a commercial concession agreement must be in writing, and the grant of the right to use the bundle of exclusive rights must be registered with Rospatent, Russia’s intellectual property office. Without registration, the grant of the right to use those rights is deemed not to have taken effect. Signing a new agreement does not, by itself, replace this procedure.

If the parties change the term of a previously registered grant of rights, the corresponding amendment must be registered. When entering into a new agreement, they should establish how the grant of rights under it will be registered. The precise documents required depend on the legal structure chosen, so these should be checked before the current term ends.

Specify who will prepare the documents, submit the application, pay the official fees and respond to requests from Rospatent. Do not assume that continued payments are sufficient evidence that use of the brand has been properly formalised.

Practical takeaway: before selling a franchise, prepare a renewal calendar, a compliance review process and a procedure for agreeing new terms. Renewal should ensure continuity of rights and clear obligations for both parties, rather than turn into urgent negotiations on the eve of expiry.