5 Unfair Business Practices To Avoid In New Zealand

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Franchising is a very popular form of running a business. However, the reality is that circumstances can change and agreements come to an end. Exiting a Franchise Agreement in New Zealand isn’t as straightforward as it may seem.

When you first entered into a Franchise Agreement, you probably noticed the extensive number of rules and regulations. These rules can be just as complex at the end of the agreement. Whether your franchisor has breached the contract or you’re simply ready to move on, it’s wise to consult a lawyer before taking any action.

The exit of Holden from the New Zealand market is a prime example of the complexities involved if you don’t adhere to franchising laws. Consequently, it’s important to understand how Franchise Agreements can be terminated for both franchisees and franchisors in New Zealand.

What Happened With Holden?

General Motors’ decision to retire the Holden brand from the New Zealand market left many dealership owners (the franchisees) facing financial difficulties.

In response to the abrupt exit, dealership owners argued that they were entitled to compensation for their investments made shortly before the announcement.

General Motors offered a compensation package, which included provisions for dealers to continue operations for an extended period and compensation for the loss of new sales for the remainder of their agreements.

While the case was initially centred on Holden, it brought to light broader issues regarding the power imbalance between franchisors and franchisees, and the potential for franchisees to incur sudden losses.

Even though this occurred in New Zealand, it serves as a stark reminder of the potential complexities in franchising. This underscores the importance of understanding the termination clauses within your Franchise Agreement.

Who Enforces The Rules Around Franchising?

In New Zealand, the main bodies governing franchising are the Commerce Commission and the Franchise Association of New Zealand (FANZ).

FANZ oversees aspects such as:

Disclosure requirements
Good faith obligations
Dispute resolution
Cooling-off periods
Procedures for terminating a Franchise Agreement

So, What Are The Ways Franchise Agreements Can End?

Franchise Agreements in New Zealand can conclude in several ways:

Expiration: the agreed franchising term concludes, and the franchisee ceases to operate the franchise business.
Renewal: the franchisee opts to renew the agreement after the initial term.
Extension: the franchisor elects to extend the term of the agreement.
Termination: the agreement is ended prematurely, either mutually, by the franchisor, or by the franchisee. Franchise Agreements typically make it more challenging for a franchisee to initiate termination.

Other methods include selling the franchise or transferring it to another party.

When Can The Franchisor Terminate The Agreement?

Franchisee Breach

A Franchise Agreement is laden with rules for franchisees. If these are violated, the franchisor may issue a Breach Notice.

The notice should detail the breach and the timeframe for rectification. It must also state that failure to remedy the breach could lead to termination of the agreement.

I’ve Been Issued A Breach Notice – How Do I Respond?

Upon receiving a Breach Notice, assess the alleged breach. If it’s rectifiable, address it as specified. If you dispute the breach, negotiate with the franchisor, keeping records of all communications. If no resolution is found, refer to the dispute resolution terms in your agreement.

Special Circumstances

Franchisors can terminate the agreement immediately without a Breach Notice in certain situations, such as the franchisee abandoning the agreement, becoming insolvent, compromising public health and safety, engaging in fraud, or mutually agreeing to terminate.

What If The Franchisee Was Not In Breach?

If a franchisor opts to terminate the agreement unexpectedly without a breach, they must adhere to legal requirements like providing reasonable notice and a valid reason. Franchisors should exercise this right cautiously to avoid allegations of unconscionable conduct or bad faith.

When Can The Franchisee Terminate The Agreement?

Franchisees typically have limited power to end a Franchise Agreement early without incurring costs. It’s advisable to negotiate termination terms favourable to the franchisee before signing the agreement.

Franchisor Breach

If the franchisor violates the agreement, the franchisee may pursue termination through the dispute resolution process outlined in the regulations or the agreement itself. The outcome will depend on the strength of the franchisee’s case.

Cooling-Off Period

Under FANZ, new agreements come with a 7-day cooling-off period, allowing franchisees to withdraw if they reconsider. This does not apply to renewals or extensions. The franchisor must refund any payments made by the franchisee, less reasonable expenses, as specified in the agreement.

Selling Your Franchise

If running the franchise is no longer viable, consider selling or transferring it. Review your agreement for any restrictions and obtain the franchisor’s consent. The process typically involves notifying the franchisor, providing details about the buyer, and securing consent.

Once consent is granted, consult a lawyer to prepare necessary documents, such as a Contract for Sale of Business or a Deed of Termination, and address any lease transfer requirements.

What Happens After The Franchise Agreement Ends?

The Franchise Agreement should outline post-termination obligations, such as non-compete clauses and the duty to act in good faith. Other considerations include lease arrangements and buyback provisions for stock and equipment. It’s prudent to have a lawyer review your contract as the end of the agreement approaches.

Franchising Resources

Franchising law is complex and often requires specialised legal assistance. We offer resources to assist you at various stages of franchising, including:

Need Help?

Understanding mutual obligations and consequences upon exiting a franchise agreement is crucial for both parties. If you’re considering ending the agreement or selling your business, our team of lawyers is ready to assist with questions such as:

What rights do I have to end my agreement early?
Can I terminate the agreement if the other party has breached?
What do I need to do if I want to sell the business?
Can I operate a similar business after the agreement ends?
Does any part of the agreement apply after it ends?

If you would like a consultation on your options moving forward, you can reach us at 0800 002 184 or [email protected] for a free, no-obligations chat.

Joe Casey

Joe is a final year law student at the New Zealand National University. Joe has legal experience in private, government and community legal spaces and is now a Content Writer at Sprintlaw.

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