An easy exit

The general practice, on the expiry of a franchise agreement, has been for a franchisor to grant its franchisee an option to renew the franchise for a further term. Such options are usually subject to various conditions with which a franchisee is required to comply, most of which don't cause a problem. But there is one notable exception - and it is becoming a bone of contention.

This is a prohibition which makes any renewal conditional upon the franchisee releasing the franchisor from any claims (etc) which the franchisee may have against the franchisor and which arose during the term of its current franchise. There is no specific legal provision against such a condition, but it does raise ethical questions.
Such a condition usually isn't queried by a franchisee at the time of signing the franchise agreement but can cause problems at the time of renewal.

Disputes do arise between franchisees and franchisors. For example, a franchisee might feel that goods supplied by the franchisor are defective and is reluctant to pay for them; or the franchisee may think that he/she overpaid for computer software support services, advertising services and so on.

Hopefully, most such claims can be resolved amicably, but in some cases they can be long standing and acrimonious, and can involve legal proceedings. In these circumstances, franchisors do not see why they should be forced to enter into another franchise term with a franchisee with whom they are or may be litigating.

Such circumstances do not make for a harmonious relationship between the parties and do not bode well for the future. Franchisors therefore think it is perfectly legitimate and reasonable of them to require franchisees to resolve all outstanding issues or waive any rights or claims they may have against a franchisor in return for the grant of new franchise rights. This would have the effect of the parties starting the new franchise term with a clean sheet.

There is clearly some merit in this argument. But is it unreasonable? Surely what is sauce for the goose is sauce for the gander. If it is reasonable for the franchisee to release the franchisor, why not also have a provision that works the other way around?

Many franchisors have accepted this line of reasoning and provide for a mutual release as a pre-condition to renewal. However, other franchisors disagree, saying that the provision is too wide and one that is unable of catching unforeseen circumstances.

Experience has shown that most disputes between franchisor and franchisee are financial in nature. Franchisors that do not like the mutuality aspect of such a release argue that it is not often that a franchisor has any financial obligations to a franchisee, whereas such obligations on the part of a franchisee are a common feature of most franchise arrangements. (The most obvious exception is in the case of a trading account where franchisees buy products from franchisors.)

By way of compromise, I would suggest that franchisors, while insisting on the franchisee releasing the franchisor from any claims as a pre-condition to the grant of a renewal, agree to exclude from such a release any arguments which the franchisee and the franchisor may have concerning any trading account between the parties. Such a provision would deal with one of the most frequent sources of problems in this area and one which should assuage some of the franchisee's fears.

If franchisors are given the last word in the matter, they usually conclude the discussion by stating that if a franchisee has significant problems with the franchisor and feels strongly about it, then he or she would be foolish to want to renew for a further term. In these circumstances, the franchisee probably would be better off not exercising the option to renew.

After all, generally speaking, the choice of whether or not to exercise the option is entirely that of the franchisee. The franchisor cannot make a franchisee renew, it can only react when a franchisee chooses to exercise his/her rights. A franchisee should not expect to have his cake and eat it too.