Generally, franchisors don’t grant perpetual renewals. The reason most franchisors don’t is that it can be difficult for a franchisor to terminate a franchise agreement or have sufficient grounds to refuse an automatic renewal under a renewal clause in a franchise agreement, even if a franchisee is performing badly.
Renewal clauses contain conditions that have to be satisfied if a franchisee is to receive a renewal, but those conditions are sometimes subjective and, as a result, there may be uncertainty as to whether the franchisor is entitled to terminate. Where there is uncertainty, issues can end up in court.
In view of the above, franchisors prefer a situation where after a fixed number of renewals, there is no contractual right in favour of a franchisee to renew. That has the advantage of being clear cut. However, a franchisor could renew the franchise agreement, even though it’s not obliged to do so.
Generally, in a five-year term you would expect two automatic renewals, in a 10-year term one automatic renewal and, in the case of the much rarer 25-year terms, you would not expect any renewal.
John Pratt is senior partner at specialist franchise firm Hamilton Pratt and has advised franchisors for over 25 years.