How to Draft a Termination of Franchise Agreement Letter

Background on Termination of Franchise Agreement

Termination of a Franchise Agreement refers to when an agreement signed between a franchisor and a franchisee has been revoked. This can be a difficult subject to broach, and can lead to extensive litigation if not handled well. Often times, however, termination is necessary. In some cases, a franchisor might need to end the relationship with a franchisee if the business model continues to show losses in sales over long periods of time . Likewise, in some cases, a franchisee might have violated the franchise agreement, meaning the franchisor needs to terminate that agreement. Franchisors should try to only terminate a franchise agreement if absolutely necessary, and if it is, they should do so in a lawful franchise termination.

Legal Issues when Terminating Franchise Agreements

Both parties should be conscious of not breaching the terms of the Franchise Agreement. Breaching those terms might expose the other party to either financial or legal penalties. For the franchisor, there might be exposure not only to the franchisee, but also to other franchisees who are aware of the termination and have the opportunity to approach another franchisee. For a franchisee, it might expose them to legal penalties (i.e., loss of deposit or other payment) and, where the terminal signs another lease, liability to the former landlord (i.e., for a lease which the franchisee has walked away from). Whether you have agreed (or been forced) to terminate the franchise, there are a number of legal considerations that should be taken into account. First, what notice period is required under the terms of the franchise agreement? Are there any specific conditions which must be met by the franchisor or franchisee in order for the termination to be valid? Are there any specific penalties for failing to comply with these terms? Are there any residual obligations after the termination has taken place? Regardless of the legal requirements, one would hope that both parties would engage in some form of continued correspondence during and after the termination, particularly if the reason for the departure is amicable. It is not unheard of, for instance, for two companies to mutually agree that one may terminate its contract, while other companies engaged in franchising may be able to continue their relationship in a different capacity or on different terms.

What to Include in a Termination Letter

Regardless of the reason for termination, here are the essential elements:
The date of the letter.
The effective date of termination.
A statement that the termination or non-renewal is being sent pursuant to terms of the agreement.
If the agreement permits the franchisee to continue to operate the franchise under specific circumstances, a reference to those terms must be included.
Application of a specific reason for termination/citation of the breach. If citing a specific default or breach, it is important to include reference to the specific paragraph of the agreement. (Some franchisors include a checklist of the breaches). The franchisor still needs to prove the breach in a court action, but the letter provides evidence of the specific reason for the termination.
Note: In some states, stating the reason for termination may be required or provide greater clarity to the franchisee and may have the effect of starting the clock on any cure period.
What happens after termination: the handover of the manuals, surrender of equipment, redeliver the franchise agreement, etc.
If notice has been provided that a counter notice is forthcoming, then the letter should reference the Franchise Disclosure Document and advise the franchisee that they can request a copy of the FDD from the local office of the Attorney General in their state.

Steps for Drafting a Termination Letter

1. Subject Line

Start with a simple email subject line that includes the signoff, the franchise brand and territory. For example: Franchise Agreement Termination – Burger King – Flaglers.

2. Addressing the Letter

The To line should include the name of the Franchisee as indicated in the franchise agreement. The From line should include the attorney’s name and law firm.

3. Openers

Dear Mr. Franchisee,
I hope your family is well.

4. Body

The first sentence should state the purpose of the letter: The purpose of this letter is to inform you that the Franchise Agreement between Franchisee and Franchisor will be terminated effective Friday, June 30, 2023.

5. Reason for Termination

A one or two paragraph statement is all is required here. You want to simply get to the point. There are more formal letters that you could provide on the subject but there is no need at this time.

6. Closing

The closing should start with the words Thank You and offer assistance where the Franchisee has an overall question. A broad inquiry that is not specific to your franchise agreement. You want to avoid any opening that could be construed to mean that you are leaving open any negotiation with respect to the termination of the franchise agreement.

7. Signature Block

The signature block should include the attorney’s email address and cellphone number. The email address allows the franchisee to have easy access plus a couple of clicks to get you on the telephone. And the cellphone allows them to send a text message. This increase the likelihood of a response and the speed with which you receive the response.

Sample and Template of Termination Letter

Termination of Franchise Agreement Letter Template
[Franchisor’s Letterhead]
[Today’s Date]
[Franchisee’s Name]
[Franchisee’s Address]
[City, State, Zip Code]
Dear [Franchisee’s First Name]:
We are in receipt of your "notice to cure" correspondence dated [Insert Date].
As per our [exclusivity agreement OR licensing agreement] for [insert trademark] (the "Agreement"), you were given [insert number of days as per the agreement] to cure the default and to make arrangements to pay the amounts owed to [your company name], which is due and require per our Agreement. In your letter, you affirmatively represent that you have paid the amount due but you have failed to include a copy of the cancelled check or other document authenticating this payment.
If your intention was to cure the defaults referenced in your correspondence , you again have [number of days as per the agreement] from the date of this notice to cure all defaults and to make arrangements to pay all outstanding fees and royalties and bring your account up to date per our Agreement.
Irrespective of whether you have cured your defaults under the Agreement, [your company name] will not be renewing the franchise or license for [insert trademark], which is currently in your possession. Your use of this mark following this letter will constitute trademark infringement under the Lanham Act.
Therefore, we hereby notify you that in accordance with the obligations contained in our Agreement, it is hereby cancelled and terminated effective on [insert date] fourteen (14) days after receipt of this letter.
We hope you understand that this action is being taken because we have determined it to be in our best interest in protecting the reputation of [insert trademark name] and our franchise network. We appreciate the time and interest you have shown in us and your business, but we are confident that this action is warranted.
Very truly yours,
[Company Name]

Post Termination Issues

A stipulation for the return of inventory, equipment and supplies must be included in the agreement. Often times, a franchisor will have an existing system-wide program for franchisees to return unused inventory and supplies for credit toward future purchases. Franchisees should be certain that they follow the terms of the return policy, as deviations from it may lead to disputes. After termination, franchisors may or may not agree to reduce or eliminate franchisees’ financial obligations. A franchisor must cease using the franchise for any purpose and must issue a public notice of termination. The Franchise Disclosure Document should contain a sample of this notice. The franchisee must cease using the marks, the FDD, advertising, signage and anything else franchisor-related. There is also the issue of an existing supply agreement. In such cases, a skewing of the usual set off process may be necessary, since all of the products have been returned and the franchisee is usually no longer able to perform its side of the bargain. The parties must come to an agreement as to how to settle outstanding balances and resolve other outstanding financial obligations.

Avoiding Legal Problems after Termination

The one thing that can make a termination of franchise agreement letter problematic is a failure to avoid post-termination litigation as a result of the letter, which in turn, can increase your costs to deal with the litigation. Ensuring the letter is legally bulletproof is an important step in helping avoid litigation.
You can also help avoid litigation if the letter gets to the franchisee quickly after termination. In addition, communicating with your franchisee in a calm and respectful manner (of course, this can be very difficult due to your anger and frustration) following a termination can go a long way towards ensuring litigation is avoided .
As mentioned above, seeking legal advice is also important. There may be issues that arise that span several agreements (for example – single family and development agreements), and those agreements need to be looked at to ensure that terminating one agreement does not impact the other agreements. In addition, other stakeholders may be impacted by the termination, such as suppliers or landlords. Having experienced counsel help you to navigate those issues is critical to ensuring that you continue to keep your commitments on time, and do not create unnecessary headaches for yourself.