How to terminate a franchise agreement

Question from a franchisor (Quebec): What are the steps a franchisor should take to terminate the franchise agreement of a franchisee in default under the terms of said agreement?

Answer: To terminate a franchise agreement is not something to be taken lightly. There are a number of steps to take prior to terminating a franchise agreement. Hereafter please find a brief summary of those steps.

First of all, it is important to study the situation of the franchisee and to qualify the default. This implies verifying the financial resources of the franchisee and describing in detail the default(s) the franchisor wishes to invoke to terminate the franchise agreement. The Quebec Civil Code specifically states that a default must be sufficiently important or repetitive to terminate a franchise agreement.

At this point, the franchisor also verifies if the default is specifically mentioned in the default and/or termination section of the franchise agreement and that the default gives the franchisor the right to terminate the franchise agreement. In the event the franchise agreement provides a process to follow, delays to respect and/or notices to send, the franchisor follows what is outlined in the franchise agreement.

Afterwards, the franchisor analyses the effects that it may face in the event it terminates the franchise agreement (suppliers, other franchisees, bank, landlord, etc.) and the ancillary contracts (guarantees, inventory repurchase agreement, assignment of rank, moveable hypothec, option and/or obligation to lease the premises, etc.).

Based on the information hereinabove gathered, the franchisor makes a decision based on its objectives (and interests) in the file at hand (exercise of hypothecary rights, buy out the banks position, file a motion to terminate the franchise agreement and in damages, initiate negotiations, purchase the assets of the franchisee, transfer the lease, present an injunction or a seizure before judgement, etc.). 

Given the potential repercussions of terminating a franchise agreement and to ensure a franchisor is well prepared and has followed all the steps outlined in the franchise agreement or just to make sure the franchisor hasn’t misinterpreted the applicable default and/or termination provisions in the franchise agreement and drafted the demand letter properly, I suggest a franchisor consult a franchise attorney during this process.

Whether the franchisee or the franchisor wishes to terminate a franchise agreement, the contents of the demand letter must be one in the legal sense of the term.

In Centre Laser Group L.R. Inc. c. Soucy (C.S. 2007 No.- 450—17-002126-069), the franchisee sent the franchisor a termination notice that was incomplete and contained no delay for the franchisor to remedy the default.

In his judgement, the Honourable Judge François Tôth states, “the demand letter is an essential formality that a creditor must accomplish prior to exercising its recourses. The demand letter is a formal notice to the debtor specifically and precisely describing the grievances that are reproached and giving the debtor a last chance to correct them…”(the translation is ours). In this file, an injunction was granted against the franchisee because the demand letter was not one drafted in the legal sense of the term.

In another recent case, Mrs Rachel Cloutier vs. Multi-Menu (2004) Inc. (S. C. 2008 No. 500-17-041224-083), the facts are similar. Multi Menu (2004) Inc., a Master Franchisor, sends a notice of termination to Mrs Cloutier, a Master Franchisee.

In this file in which Mrs Cloutier asks the Court to grant her a temporary injunction, the Honourable Judge Kevin Downs, S.C.J. grants the injunction to Mrs Cloutier based on the affidavit submitted in support of the injunction which alleges that Multi Menu (2004) Inc. had made certain grievances to Mrs Cloutier that were not founded on the provisions of the Sub Franchise Agreement and did not constitute, in any case, a default under the said agreement.  Furthermore, the demand letter did not contain a delay for Mrs Cloutier to remedy the grievances.

In his conclusions, Judge Downs orders Multi Menu (2004) Inc. to respect the Sub Franchise Agreement between the parties and to permit Mrs Cloutier to present herself as a Master Franchisee of Multi Menu (2004) Inc.

In this file, Mrs Cloutier was represented by Jocelyne Gagné (Lavery, De Billy, Montreal) and Claude J. Pellan. Multi Menu (2004) Inc. was represented by Lori Karpman (Lori Karpman & Associates Ltd.) and Daniel Urbas (Borden, Ladner, Gervais).

Please note the injunction granted in this case is temporary and that the hearings for the injunction are not finished.

In conclusion, being well prepared by properly qualifying an act or omission of a franchisee or franchisor as a default under the terms of the franchise agreement, confirming that the default is specifically spelled out in the franchise agreement and drafting a demand letter that contains all the “legal” elements will determine whether or not a franchisor or franchisee has the right to terminate a franchise agreement and minimizes the risks associated with the decisions and recourses that follow.