Cancellation after the cooling off period

A franchise agreement may be cancelled after the ten day cooling off period has expired, if:

  • the agreement itself is invalid, or
  • where one of the parties has been induced to enter into it by a misrepresentation by the other, or
  • where one of the parties has committed a material breach of the agreement.

If a franchise agreement contravenes, or does not comply with, the requirements of the CPA or the regulations, including the stipulations of the regulations in respect of deposits and initial payments, the agreement will be invalid, either in total or to the extent of the contravention. In addition, the provisions of sections 48(1), 51(1) and 65(2), dealt with above, will apply in the same way as where no agreement is concluded, or where the agreement is cancelled during the cooling off period. In other words, a franchise agreement may not provide, without qualification, for payment of a non-refundable deposit.

Practical Solutions

FASA appreciates that neither party wants to be committed to a franchise relationship before doing its homework, and assessing the viability of the prospective business.  The franchisor is entitled to require a deposit in anticipation of these expenses, both in connection with the initial investigations and in assisting the franchisee in setting up his business.  On the other hand, the franchisee should not be expected to forfeit a large sum of money in anticipation of services he may never receive.

FASA recommends, in order for both parties protect themselves against these risks, that:

  • the contractual documents (both the franchise agreement and any preliminary ancillary agreements) are drafted so as clearly to set out the intentions and expectations of both parties. Importantly, the agreements should set out clearly for what purposes any deposits or initial fees are to be used.
  • Ideally, the agreement should be signed, and the “cooling off period” should be allowed to expire, before the franchisor incurs any expenses for which he expects to be reimbursed.
  • Where this is not practically possible the agreement should be made conditional upon the completion of the preliminary research and formalities and the obtaining of necessary finance, or a “pre-franchise agreement” can be concluded. The franchise or pre-franchise agreement should stipulate:
  • That a deposit will be paid and the amount to be paid;
  • The processes that will be undertaken by the franchisor and the matters in regard to which the franchisor will have to satisfy itself before the franchise agreement becomes unconditional, or before a franchise agreement is signed;
  • The costs that the franchisor will incur in this process, or at least how they will be calculated; and
  • An acknowledgement by the franchisee that, if the agreement is not concluded or if it is cancelled by the franchisee during the cooling off period, the agreed amount of the expenses incurred by the franchisor will be deducted from the deposit when it is refunded.

For further information contact Ian Jacobsberg, Partner at Hogal Lovells (South Africa) Ltd – Tel: 011 286 6900 or email ian.jacobsberg@hoganlovells.com

Deposits – Where a Franchise Agreement has been signed

The CPA requires that a franchise agreement must be in writing and signed by or on behalf of the franchisee and must include any “prescribed information”. In regard to deposits the regulations stipulate that a franchise agreement must contain:

  • “confirmation that any deposits paid by the prospective franchisee will be deposited into a separate bank account and a description of how these deposits will be dealt with”.
  • full particulars of any initial fee payable to the franchisor on the signing of the franchise agreement, and the purpose for which it is to be applied.

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Deposits – Where No Franchise Agreement has been signed

Where No Franchise Agreement has been signed

FASA’s Code of Ethics provides for deposits paid in anticipation of the conclusion of a franchise agreement in the following terms:

Where a Franchisor Member receives any monies from any prospective franchisee in contemplation of the conclusion of a Franchise Agreement…and, whether at the instance of the Franchisor Member or the prospective Franchisee, negotiations in connection with such contemplated agreement are terminated without an agreement being concluded: –

 

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Dealing with deposits in terms of Franchise Agreements

It is common practice, during the course of discussions between a franchisor and a prospective franchisee, with a view to concluding a franchise agreement, for the franchisor to require the franchisee to make payment of a deposit. In such cases, the franchise agreement, or another document that the franchisor requires the franchisee to sign, in anticipation of the conclusion of a franchise agreement, often states that the deposit is “non‑refundable” in the event that a franchise agreement is not signed, or, having been signed, is cancelled shortly thereafter. There remains a significant amount of misunderstanding around the question as to whether, and when, money paid by a franchisee as a deposit may be retained by the franchisor.

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Termination of Franchise Agreement Best Practices

Franchise Agreement – FASA Practice Note – Section 197 of the Labour Relations Act

The termination of a franchise agreement by the franchisor does not in itself constitute a transfer of a business as a going concern, even if the franchisor thereafter appoints another franchisee in the same area, and serving the same customers, as the previous franchisee.  Therefore, the new franchisee is not obliged to take over the rights and obligations of the previous franchisee towards its employees, as is required in terms of section 197 of the Labour Relations Act on the transfer of a business as a going concern.

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