Why take legal advice?

Legal expert Jane Masih explains why you should take independent legal advice before signing a franchise agreement

When deciding whether or not to buy a franchise you are likely to have been told that you should take independent legal advice before signing the franchise agreement. At the same time your prospective franchisor is likely to have told you that the terms of the franchise agreement cannot be negotiated. If this is correct, what is the benefit of paying for legal advice, if nothing can be changed?

An independent review of the agreement will ensure that you understand the nature of the legal obligations you will be bound by if you sign the agreement. By not taking advice, you run the risk of entering into what may be one of the most expensive investments you will ever make, without having an accurate understanding of the ‘small print'.

By way of example, a common misunderstanding often occurs around how long you are committed to the arrangement. Many franchise agreements grant the franchisee rights for a fixed period of time. You may assume you have the right to ‘resign' from the business, as you can from a job, if the business doesn't go as you had hoped. Nine times out of ten, this is not the case. Your franchisor will be expecting you to operate the business throughout the fixed term and there are only limited ways in which the agreement will come to an end before the expiry of the fixed term. These include:

• Selling your franchise business in accordance with the rules set out in the agreement.

• The franchisor terminating the agreement because you have breached one or more of the provisions in the agreement, which gives them the right to terminate.

Termination risks an expensive dispute with the franchisor and must be avoided. Many franchisors will look for compensation for the loss of management services fees for the remainder of the fixed term and the costs of recruiting a replacement franchisee. While you, as a prospective franchisee, reading the agreement may not understand that the initial term of the agreement is fixed, an experienced franchise lawyer certainly will.

If a basic term of the agreement such as how long it lasts can be overlooked, what other essential terms can be missed by the franchisee deciding not to take professional advice and assuming that, because others have signed the agreement, it will be OK?

A legal review should highlight if the franchisee's option to renew is conditional, meaning that their right to renew is not automatic and the franchisor can insist on certain requirements being met before the agreement can be renewed. Common requirements include the franchisee attending further training, updating equipment and/or vehicles and replacing signage. It is not always the case that the new franchise agreement will be identical to the original agreement. Franchise systems evolve and there are often legitimate reasons for a franchisor wishing to change the agreement. Many franchisees make the mistake of assuming that if they renew the agreement it will be identical to their old agreement. Often the agreement provides that the franchisee has the right to ‘the then current agreement', which could be substantially different by the time the franchisee wants to renew.

Although a legal review of the agreement may not result in changes to the agreement it will give you knowledge about the contractual arrangements you are signing up to. The time to change your mind is before you sign, not afterwards.

The franchise agreement is not simply part of the franchisor's marketing literature. It is a legal document creating rights and imposing obligations. The most important reason why you as a prospective franchisee should ask a solicitor who is knowledgeable about franchising to review the agreement is to ensure that you know, in plain English, exactly what you are taking on in terms of legal obligations before signing on the dotted line. Ignorance can prove to be expensive!

Jane Masih
Jane heads up the specialist franchise team at Owen White Solicitors advising franchisors and franchisees in the UK and internationally

You may also be interested in...