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Aspects of a Franchise Agreement – Part Two – Franchisee Obligations

Published: 23 Nov 2022

The franchise agreement sets out the various obligations of a franchisee during the term of the franchise agreement. Such obligations include:

Payment of all fees

Franchisees must ensure that all royalties, marketing fees and any other fees payable under the franchise agreement are paid in full and on time.

Operating the business in accordance with the franchise agreement

The franchisee must operate the business in accordance with the agreement and any further requirements of the franchisor including complying with the branding, customer information and reporting requirements.

Not to prejudice goodwill or intellectual property of the franchisor

Intellectual Property is one of the biggest parts of a franchise system and franchisees are only permitted to use the intellectual property for the purpose of operating the franchised business. Some franchise agreements set out obligations for the franchise to advise the franchisor if it discovers a third party that may be infringing the intellectual property and assist the franchisor in any proceeding.

Marketing obligations

The Franchisor will conduct marketing for the entire network. However, the franchisee must also conduct marketing within its territory in order to grow the business. The franchisee cannot rely on the franchisor marketing alone and marketing in its territory may also be a requirement under the annual business plan.

Compliance with minimum performance criteria

Franchisors will set out minimum performance criteria in the agreement. These are targets for the franchisee to achieve in order to grow the business in the territory. Any minimum performance criteria should be feasible given the market circumstances. If the franchisee does not comply with these obligations, the franchisor will consult with the franchisee to set out a remedial plan. Any proposed minimum performance criteria should be discussed and agreed with the franchisor.

Acting in Good Faith towards the franchisor

This is one of the most important obligations of a franchisee. All franchisees must be open and honest with the franchisor. They must not do anything which they know will be a breach of a franchise agreement.

Comply with post termination obligations

Certain clauses survive termination of an agreement. These clauses include the use of the franchisor’s intellectual property and confidential information as well as restraints regarding working in a similar business.

In conclusion franchisees must ensure that they comply with all of the terms of the agreement. Failure to comply with the obligations set out above may be grounds for a breach of the agreement, or, in the case of repeated breaches, termination of the Agreement.

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