Termination and Non-Renewal of a
Franchise in California
By Matt Dickstein
All franchise relationships end sometime,
usually by the franchisee selling the franchise, dropping
out of the franchise system or getting kicked out. In this
article I briefly summarize what happens when a franchisee
sells, leaves or quits a franchise system, or when the
franchisor terminates or refuses to renew the franchise.
Franchisee's Sale or Quit of the
Franchise. The best way for a franchisee to get
out of a franchise system is to sell the franchised
business. In California, there is no special law that
protects a franchisee's right to transfer a franchise. The
matter is governed by the Franchise Agreement, which usually
requires the franchisor’s consent, said consent not to be
Franchise System. If the franchisee can’t sell
the franchised business, then sometimes all he can do is
walk away from it. Here the franchisee’s biggest worry is
that the franchisor will sue to recover liquidated damages
that are specified in the Franchise Agreement, or to recover
the franchise royalties and fees that the franchisee would
have paid had he stayed in the system until the end of the
I cannot give generalized advice that
covers all scenarios for the end of a franchise
relationship. Instead you must look at a range of issues,
including the precise language of your Franchise Agreement,
the franchisor’s claim for lost franchise fees, the
franchisee’s counter-claims and defenses, and more. See my
article Legal Claims and Defenses
in Franchise Litigation, for
more discussion of possible liability, claims and defenses
when a franchisee leaves a franchise system (whether
voluntarily or involuntarily).
The franchisor also might try to enforce a
non-competition clause in the Franchise Agreement. For more
on this subject, see my article Franchise Non-Competition
Agreements in California.
Franchisor's Termination or Non-Renewal of
A franchisor terminates a franchise if she
cancels the franchise before the end of the term.
Non-renewal occurs if the franchisor refuses to renew the
franchise at the end of the term. The result is the same
for both termination and non-renewal – the franchisee loses
the franchise. Be aware that under California law, a
non-renewal might occur if the franchisor makes unreasonable
changes in the royalties, fees and terms of the franchise,
where the changes have the effect of inducing the franchisee
not to renew.
In California, a franchisor must have good
cause to terminate or to refuse renewal of the franchise.
Good cause includes failure by a franchisee to cure a breach
of the Franchise Agreement within a reasonable cure period
after written notice of default (up to 30 days), except for
certain non-curable defaults which justify termination
immediately upon written notice. Failure to pay franchise
fees gets a 5 day cure period.
When faced with a possible termination or
non-renewal, it is extremely important that the franchisee
take action before the termination or non-renewal happens:
First, it is easier to keep a franchise than to get it
back. Second, if the franchisee loses the franchise, he
might lose the cash flow needed to pay for the fight.
Third, California franchise law does not provide much by way
of statutory damages for an illegal termination or
non-renewal. In brief, as soon as the franchisor gives
notice of the possibility of termination or non-renewal, the
franchisee must respond quickly and cut-off the dispute
before it gets too far along.
Once the dispute gets a little momentum,
then the two sides must prepare for war. See my next
article, Legal Claims and Defenses
in Franchise Litigation,
for more on this topic.
I’ve tried to make this article as simple as possible.
California franchise law
is very complex, however. You need a competent franchise
attorney to help you.
If you want
to read more about franchising, try my main page
Attorney. From there you can link to other
pages and articles of interest.
me to schedule a legal consultation: