Default and Cure Rights

What Are Cure Rights?

A cure right gives the defaulting party an opportunity to correct a breach before the other party may terminate the agreement or pursue certain remedies. A cure period may begin when the default occurs, when notice is delivered, or on another date specified in the contract or required by applicable law.

Cure rights are not unlimited. Some defaults may be curable only within a short period, while other defaults may permit immediate termination without an opportunity to cure.

Common Franchisee Defaults

Franchise agreements usually contain detailed lists of conduct that may constitute a franchisee default. Common examples include:

• Failure to pay royalties, advertising contributions, technology fees, or other required amounts.
• Failure to operate according to the franchisor’s standards and specifications.
• Unauthorized use of trademarks, branding, confidential information, or system materials.
• Failure to maintain required insurance, licenses, permits, or certifications.
• Failure to submit reports, financial information, sales data, or tax records.
• Operating outside an approved territory or serving unauthorized locations.
• Failure to purchase required products or services from approved suppliers.
• Unauthorized ownership changes, transfers, assignments, or changes in control.
• Abandonment or prolonged closure of the franchised business.
• Failure to comply with health, safety, employment, privacy, or other laws.
• Criminal conduct, fraud, dishonesty, or conduct that may harm the brand.
• Violation of non-compete, confidentiality, non-solicitation, or other restrictive covenants.

Common Franchisor Defaults

Although franchise agreements often focus heavily on franchisee defaults, franchisors also have contractual obligations. Depending on the agreement, alleged franchisor defaults may involve:

• Failure to provide required initial training or opening assistance.
• Failure to provide access to required systems, trademarks, manuals, or technology.
• Material failure to perform contractual support obligations.
• Improper use or administration of advertising funds.
• Violation of territorial protections or contractual development rights.
• Material misrepresentations or failures to comply with applicable franchise laws.
• Wrongful termination, nonrenewal, or refusal to approve a transfer.

The availability of a remedy will depend on the precise language of the franchise agreement, applicable franchise statutes, common law, and the facts surrounding the alleged breach.

Notice of Default

Many defaults must be addressed through a formal written notice. A notice of default commonly identifies:

• The contractual provision allegedly violated.
• The conduct or omission constituting the default.
• The action required to cure the default.
• The deadline for completing the cure.
• The consequences of failing to cure.
• The manner in which the cure must be documented or verified.

Franchise agreements often contain strict notice provisions specifying the permitted delivery method, notice address, effective date of delivery, and persons who must receive a copy.

How Long Is a Cure Period?

Cure periods vary considerably. A franchise agreement may provide different cure periods depending on the nature and seriousness of the default.

The franchise agreement is only part of the analysis. Some state franchise relationship laws impose mandatory notice or cure requirements that may override or supplement the contract.

Defaults That May Permit Immediate Termination

Certain serious defaults may permit termination without advance notice or an opportunity to cure, subject to applicable law. Examples may include:

• Abandonment of the franchised business.
• Insolvency, bankruptcy-related events, or assignment for the benefit of creditors.
• Fraud or material misrepresentation.
• Criminal conduct affecting the brand or business.
• Repeated defaults after prior notices.
• Threats to public health or safety.
• Unauthorized disclosure of trade secrets.
• Material misuse of the franchisor’s trademarks.
• Loss of a license essential to operating the business.
• Unauthorized transfer or change in ownership.

Whether immediate termination is permitted depends on the contract and applicable law. A contractual provision authorizing immediate termination may still be limited by a state franchise relationship statute.

Repeat Defaults

Many franchise agreements provide reduced or eliminated cure rights when the same or a similar default occurs repeatedly. For example, an agreement may allow termination if a franchisee receives multiple default notices within a specified period, even if each individual default was previously cured.

Repeat-default provisions are intended to prevent a pattern in which a franchisee repeatedly violates the agreement, cures only after receiving notice, and then commits the same violation again.

Cross-Defaults

A cross-default provision treats a default under one agreement as a default under another related agreement. For example, a default under a lease, equipment agreement, development agreement, promissory note, or another franchise agreement may trigger a default under the principal franchise agreement.

Cross-default provisions are especially important when a franchisee owns multiple locations or has signed several related contracts with the franchisor or its affiliates.

What Constitutes an Effective Cure?

A cure generally requires more than beginning corrective action. The defaulting party may need to fully correct the violation within the required period.

Depending on the issue, an effective cure may require:

• Full payment of all outstanding amounts, interest, fees, and costs.
• Repair or replacement of equipment, signage, or physical improvements.
• Completion of retraining.
• Termination of unauthorized activities.
• Obtaining required insurance, licenses, or permits.
• Submission of overdue reports or financial information.
• Written evidence demonstrating compliance.
• Reimbursement of inspection, enforcement, or legal expenses where permitted.

A purported cure may be disputed if it is incomplete, temporary, undocumented, or completed after the applicable deadline.

Remedies Following an Uncured Default

If a default is not timely cured, the non-defaulting party may have one or more remedies, including:

• Termination of the franchise agreement.
• Suspension of services, system access, ordering privileges, or support.
• Recovery of unpaid amounts, interest, damages, and contractual fees.
• Injunctive relief.
• Enforcement of personal guarantees.
• Acceleration of amounts due.
• Enforcement of post-termination obligations.
• Recovery of attorneys’ fees where authorized.

A party may also reserve the right to pursue remedies without immediately terminating the relationship. Acceptance of late performance does not necessarily waive the right to enforce future defaults, particularly when the agreement contains a non-waiver provision.

Post-Termination Obligations

Termination does not ordinarily end every contractual obligation. A terminated franchisee may still be required to:

• Stop using the franchisor’s trademarks and trade dress.
• Remove signs, logos, uniforms, branded materials, and digital references.
• Return operations manuals and confidential materials.
• Transfer telephone numbers, websites, social media accounts, or listings where required.
• Pay outstanding amounts.
• Comply with confidentiality and restrictive covenant obligations.
• Cancel assumed names or business registrations containing the franchisor’s marks.
• Permit the franchisor to exercise a contractual purchase option where applicable.

Failure to comply with post-termination requirements may result in additional claims, damages, or requests for injunctive relief.

State Franchise Relationship Laws

Some states regulate when and how a franchisor may terminate or refuse to renew a franchise relationship. These statutes may require good cause, written notice, a mandatory opportunity to cure, or longer notice periods than those contained in the franchise agreement.

Frequently Asked Questions