28th April 2021 | Leigh Head | Franchising, Contracts, Corporate and Commercial

Franchise agreements are often compared to prenuptial agreements - they are only reviewed when you want to get divorced! However, the franchise agreement is possibly the most important document in the franchise system. It forms the foundation of the relationship between franchisor and franchisee, setting out their respective rights and responsibilities.

The legal framework of a franchise agreement

In the UK, there is no specific legislation that regulates franchising, meaning that franchise agreements operate under general contract law principles. However, various statutory and regulatory provisions can affect their enforcement, such as the Competition Act 1998, which prevents unfair restrictions on competition, and intellectual property laws that protect trademarks and brand identity. Additionally, if a franchise relationship breaks down, legal disputes may be resolved through contract law, equitable remedies, and, in some cases, alternative dispute resolution mechanisms outlined in the agreement. 

What is a Franchise Agreement?

Franchise agreements set out what is expected of both parties from the outset and, most importantly, define their future relationship and set out the terms that will bind them for the duration of the franchise contract. If the relationship between franchisor and franchisee breaks down or a franchisee is not compliant, the agreement plays an important part to make sure both parties are protected.

What should your franchise agreement include?

While franchise agreements are not legally required to include any specific clauses, they must clearly define the legal relationship between franchisor and franchisee. A franchise agreement should look to achieve three essential objectives:

1) The “grant” and general terms – A franchise agreement should clearly set out what is being “granted” and licenced from the franchisor to the franchisee, as well as the operating terms that apply to the grant;

2) The brand/ Intellectual Property (IP) – It should protect both franchisor and franchisee, the franchisor’s brand, IP and know-how to prevent misuse or infringement

3) The rules- It should cover the rules the parties are expected to follow in the operation of the franchised business ensuring consistency across the franchise network.

The “grant” and general terms

Since franchising does not have a dedicated regulatory framework, if difficulties should arise the franchise agreement will determine what rights and obligations have been set out.

Key elements typically covered under the “grant” include:

  • The rights granted to and the obligations of franchisee – the licence to operate the franchised business;
  • The rights either retained or granted to and the obligations of the franchisor;
  • The goods/services to be provided to the franchisee (if any);
  • Payment terms by the franchisee;
  • The overall duration of the agreement;
  • The franchisee’s use of the franchisors brand identity including trade name, trademark, signs, logos etc.;
  • The procedure to renew the agreement;
  • The conditions of terminating the agreement and what is to happen when the franchising relationship ends;
  • The terms for if and when the franchisee can sell the operating franchise business and the franchisor’s pre-emption rights;
  • The franchisor’s right to change the operating manual (the “rules” – referred to below) and franchise system.

The brand and Intellectual Property (IP)

The franchise agreement must include provisions to safeguard the franchisor’s brand identity and intellectual property. This includes protections for trademarks, trade names, logos, proprietary business systems and other confidential information. Intellectual property laws provide the legal framework for these protections, ensuring that franchisees use the brand correctly while preventing misuse by third parties or former franchisees.

It is in the best interest of both the franchisor and franchisee to ensure that no third party or ex-franchisee infringes upon these intellectual property rights and does not allow for any external use of trademarks, trade names or copyrighted materials.

The franchise agreement rules

A strong franchise system operates like a family, with all franchisees adhering to the same set of rules to maintain brand consistency. The franchise agreement ensures that all franchisees are subject to these uniform terms, typically leaving little room for individual negotiation. Therefore, it is critical that prospective franchisees request access to existing franchisees to gain insights into how the system functions, how the rules are applied in practice and to understand how the “family” works.

Legal Considerations When Entering a Franchise Agreement

When entering into a franchise agreement, it is essential to seek legal advice to fully understand the terms and obligations. Key considerations include:

  • Compliance with general contract law principles.
  • Alignment with consumer protection and competition laws.
  • The enforceability of restrictive covenants post-termination.
  • Dispute resolution mechanisms (e.g., mediation, arbitration, litigation).

Since franchise agreements often favour the franchisor, franchisees must carefully review the terms before committing. A well-drafted agreement is crucial to ensuring a fair, legally sound, and sustainable franchise relationship.

This is where Sherrards Solicitors can help you. If you’re looking at becoming a franchisee and need some assistance with the legal paperwork, feel free to get in touch, or to find out more, please contact Leigh Head. 

Related insights