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Renewal Fees In Franchising – Fair Or Foul?

— Mark Lello

Renewal fees in franchising – fair or foul?

The British Franchise Association has just issued a technical bulletin concerning their recommendations with regard to renewal fees.  Historically the BFA has required that its members do not charge renewal fees that go further than seeking to recover the franchisor’s reasonable costs (usually legal costs) associated with renewing a franchisee’s agreement for a further term, unless there are reasons to justify them.  If renewal fees exceed this then this is unacceptable in the BFA’s view.  An inability to justify the fees results in them being deemed to be unreasonable.

Interestingly, there is no requirement in the code of ethics of the BFA that there must be a renewal of the franchise agreement.  However, paragraph 5.5 of the that code does say that the franchise agreement should state ‘the basis for any renewal of the agreement’.  The BFA’s guide interprets this as follows:-

 “This requirement does not mean that there must be a renewal provision in the agreement, but that if there is, the basis of such renewal must be set out in the agreement.  The grant of a right of renewal should be fair and the franchisor should not seek by imposing unreasonable conditions to create barriers which may make renewal less attractive than it fairly should be.  The BFA discourages the charging of renewal fees if used as a method unfairly of imposing a financial burden at a time when the franchisee may be in a vulnerable position.” 

The BFA recommends as best practice that it would consider it unfair for a franchisee to be required to pay a high renewal fee or face the threat of losing their business.  Renewal fees that genuinely cover the reasonable costs and expenses of the franchisor renewing the franchise agreement are considered acceptable in the BFA’s view. 

This bulletin was issued in January 2016.

It is a good example of the BFA attempting to act responsibly as ringmaster in the arena of franchise arrangements, both to give franchisees a fair position, but also from the franchisor’s point of view, looking to the longer term, to have a happy band of franchisees to support them in the growth of their network.  It is also an interesting facet of the BFA that it has something akin to quasi-judicial status in this area, which, as an area, is not (yet) subject to the authority of a proper statutory body.

Clearly the BFA’s bulletins apply directly to the members of the association itself, but I would argue that they are also influential in showing non-BFA members what in effect the BFA-driven industry standard is.  It is therefore useful to have an eye to these bulletins when and if someone engaged in the franchise industry is potentially affected by them. 

If you are in that position, please do not hesitate to contact us for further advice in this area. 

Mark Lello

Parker Bullen LLP

mark.lello@parkerbullen.com

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