United States: What Is 'Renewal' In Franchising?

Currently eighteen U.S. jurisdictions have adopted statutes regulating franchise renewals, adding a statutory layer to a contract that may contradict terms or install terms that the parties never explicitly negotiated. The common understanding of "renewal" implies the continuation of something already in existence. In many contexts "renewal" means the extension of an existing agreement or the execution of a new agreement on similar or identical terms.

Merriam Webster's Dictionary defines "renew":

(1) To make new or as if new again; restore. (2) To take up again; resume. (3) To repeat so as to reaffirm: renew a promise. (4) To arrange for the extension of: renew a contract [italics in original].

Black's Law Dictionary defines "renewal":

(1) The act of restoring or reestablishing. (2) The re-creation of a legal relationship or the replacement of an old contract with a new contract, as opposed to the mere extension of a previous relationship or contract.

The divide between the public understanding of "renewal" and the industry practice is likely attributable in part to the economics of franchising. Because of the significant capital investment of buying a new franchise, most franchises are long-term relationships.

But long term success requires franchisors must adapt to stay competitive. Renewal for franchisors is an opportunity to modernize its system and wipe the slate clean by conditioning renewal on a general release in favor of the franchisor and refurbishment/modernization upgrades.

There is also confusion between a franchise termination and nonrenewal of an existing franchise agreement due to the patchwork statutory restrictions on nonrenewal, which usually require: (1) advance written notice of nonrenewal of the franchise agreement, (often contrary to the terms of the franchise agreement); (2) "good cause" to nonrenew; or (3) both.

When mandatory notice of nonrenewal is not provided, or good cause is disputed, and the term of the existing franchise agreement has lapsed, it is unclear whether a subsequent ending of the franchise relationship is a "nonrenewal" or a "termination," and courts sometimes use the terms interchangeably.¹

Do franchisees have a right to renew their franchise agreements?

In the majority of U.S. jurisdictions, the right to renew a franchise is governed by contract law. It is hornbook law that that the common law does not afford the franchisee any right to renew the franchise agreement.

In Delaware, Hawaii, Mississippi, Missouri, Nebraska, New Jersey, Puerto Rico, the Virgin Islands, and Wisconsin, "termination" and "nonrenewal" are synonymous, and a franchisor must satisfy the same statutory criteria for properly effecting a termination or nonrenewal.²

Conversely, in states like Illinois, Indiana, Iowa, Michigan, and Washington, termination and nonrenewal are treated differently. But in states such as Arkansas, Connecticut, California, and Minnesota, termination and nonrenewal are treated the same in some instances, but not others.³

Franchisors commonly require franchisees to renew using a franchise agreement with materially different terms from the original. It is unlikely that any franchisee is aware of the fact that "renewal" in legalese means the opposite of what "renewal" means to a non-lawyer when they sign a franchise agreement.

At the expiration of the term, the franchisee who cannot continue to operate the franchise may find that all the equity of the franchise may arrogate to the franchisor and the franchisee is barred from working in a similar type of business. Sunk costs and non-compete provisions may leave the franchisee little choice but to "renew" the franchise agreement, leaving the franchisee vulnerable to one-sided provisions that they cannot simply walk away from.

Footnotes

1. 5 ABA SECTION OF ANTITRUST LAW, FRANCHISE AND DEALERSHIP TERMINATION HANDBOOK note 15, at 8-9 (2d ed. 2012) (noting that the "language of the FTC Franchise Rule supports the argument that expiration and termination are distinct concepts").

2. Del Code tit. 6, § 2552(b); Haw. Rev. Stat. § 482E-6; Miss. Code § 75-24-53; Mo. Rev. Stat. § 407.405; Neb. Rev. Stat. § 87-404; N.J. Stat. § 56:10-5; P.R. Laws tit. 10, § 278a; V.I. Code tit. 12A, §§ 131-132; Wis. Stat. § 135.03.

3. Ark. Code § 4-72-204; Cal. Bus. & Prof. Code § 20025; Conn. Gen. Stat. § 42-133f; Minn. Stat. § 80C.14(4).

Originally Published by Westlaw Today

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