Like all businesses, there are no guarantees of success, and not all franchises are worthwhile investments. In some cases, you might even regret your decision to enter a franchise agreement. If this happens, your franchise agreement might have a provision that allows you to withdraw from it. This article will unpack cooling off periods and how long they apply after signing a franchise agreement.
What is a Cooling Off Period?
A cooling off period is a specified time during which a franchisee can withdraw from the franchise agreement after signing it. This provision allows the franchisee to get some or all of their money back.
Usually, the franchisor can keep a franchisee's money if:
- the franchise agreement provides for this right; and
- the money is for 'reasonable expenses.'
For example, the franchisor may give the franchisee training during this time. In this case, deducting costs for the training would be reasonable.
After withdrawing from the agreement, the franchisee is free from all of the agreement's provisions. However, one exception is where there are provisions relating to intellectual property and confidential information. This means a franchisee cannot benefit from any valuable information about the franchise's brand or systems after exiting the agreement.
Although a cooling off period is a necessary provision to include in franchise agreements, it should be treated as a last resort rather than as a 'plan B'. This is because disputes often arise about cooling off periods.
The FANZ and Cooling Off Periods
The Franchise Association of New Zealand (FANZ) is the peak body representing the franchising community at government and other industry forums. About one-third of all franchises in New Zealand are members of the FANZ.
As part of FANZ membership, members must abide by the organisation's Code of Practice and Code of Ethics. No franchising-specific legislation exists in New Zealand, but the FANZ aims to bridge this gap and provide for minimum standards and requirements. These standards protect franchisors and franchisees and promote the franchising business model on a broader scale.
One specific provision of the Code of Practice requires all franchise agreements to include a cooling off period. Likewise, this cooling off period must last at least seven days, and the franchisee must receive a full refund of any amounts paid (minus specified expenses).
Cooling Off Periods for Non-FANZ Members
Again, there is no franchise-specific legislation in New Zealand. Accordingly, franchisors are not legally required to include a cooling off period in their agreements.
However, including a cooling off period is becoming a more common provision for franchise agreements, even for those who are not FANZ members. Such a provision reflects a franchisor's good intentions and is considered good practice.
Further, although there is no franchise-specific legislation, more general legislation in New Zealand, including the Fair Trading Act and the Contract and Commercial Law Act, regulates certain aspects of franchising.
Including a cooling off period as a provision in a franchise agreement can help avoid disputes relating to the terms of the contract or otherwise avoid a negative perception of your franchise's business practices. With this in mind, it is best to include a cooling off period in franchise agreements, irrespective of your FANZ membership.
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What About Renewals?
While franchise terms vary, a common franchise term in New Zealand is five years. This five-year period usually comes with a right of renewal for another five years, making the agreement 10 years in total. There is typically a cost associated with renewing the franchise agreement.
Importantly, under the FANZ Code of Practice, cooling off periods do not apply to franchise renewals, resales of franchises, or extensions of existing franchise agreements.
Key Takeaways
If you enter a franchise agreement and change your mind, a provision that provides a cooling off period will allow you to withdraw from the agreement. Some key things to note about cooling off periods include that they:
- must be included in the agreements of FANZ members;
- must be for a minimum of seven days; and
- are not required to be included in franchise agreements of non-FANZ membe
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.