Franchise Termination in Saudi Arabia: Rights of Both Sides

You receive a letter terminating the franchise. Or you reach a point where keeping the branch open only adds to your losses. Before you close the business or ask to recover your investment, you need to know whether the contract ends because its term expired, by agreement, or because of a breach. This affects the notices and the financial claims, and whether the problem can be fixed instead of ending the relationship.

The short answer: the franchisor may not terminate the franchise before its term without your consent except for a legitimate reason listed in Article 18. The best known is a material breach that you did not fix within 14 days of written notice. If the franchisor terminates without a legitimate reason, it must buy back the assets used exclusively in the franchise and compensate you (Article 20). As a franchisee, you may terminate without compensating the franchisor if it materially breached its disclosure or registration duties, within one year of learning of it or three years from the breach, whichever comes first (Article 17).

Start by identifying what happened to the contract

An investor may say he wants to "cancel the franchise" when he means non-renewal or an agreed exit. A franchisor may send a letter ending the relationship before its end date. These are different situations, and the situation must be described precisely before deciding on the financial claim.

Collect the agreement, its annexes and the disclosure document. Record the signing date, the start of operation, the first dispute and the notices exchanged. Then decide your goal: keep the branch and fix the problem, end the relationship, or claim a specific loss? Choosing the goal early helps you make a clear request that can be discussed.

When can each party terminate a franchise in Saudi Arabia?

Article 17 gives the franchisee the right to terminate by written notice if the franchisor materially breaches its disclosure or registration duties, within one year of learning of the breach or three years from when it happened, whichever comes first. This termination is without compensation to the franchisor. Article 19 allows a claim for compensation for this breach without terminating. Check the date of your contract: Articles 17 and 19 do not apply to franchise agreements made before the law came into force, under Item Two of the Royal Decree approving it.

Article 18 prohibits the franchisor from terminating before the end of the term without written consent, except for a legitimate reason. The legitimate reasons in the text are:

• The franchisee breaches a material obligation and does not fix it within no more than 14 days of written notice.
• The franchisee is liquidated or dissolved, assigns the franchise business to its creditors, or disposes of its assets to others.
• The franchisee abandons or voluntarily stops the business for more than 90 consecutive days.
• The franchisee repeatedly fails to comply with the agreement despite written notice.
• A danger to public health and safety, loss of a required licence, or material legal violations that harm the franchise's reputation.
• Commercial fraud, or infringement of the franchisor's intellectual property.
• Any other case that the agreement states is a legitimate reason for termination.

Unless the agreement says otherwise, it also ends if an individual franchisee dies, loses legal capacity, develops a health condition that prevents him from running the business, or has liquidation proceedings opened under the Bankruptcy Law; or if a franchisee company is liquidated or ceases to exist. A conversion or merger of the company does not end it (Article 16).

Do not put every dispute under one heading. Weak sales need different checks from disclosure information, and late fees are different from disrupted supply. Write down the obligation you say was breached, the document that proves it, and what the other party is asking from you.

Compensation and equipment: keep the accounts separate

Article 20 regulates the buy-back of assets when the franchisee terminates under Article 17, when the franchisor terminates in breach of Article 18, and when the franchisor refuses to renew or extend for a reason outside the cases in paragraphs 2 to 5 of Article 15. The buy-back covers the physical assets used exclusively in the franchise business that the investor bought from the franchisor, or from others on its instructions.

The buy-back takes place within 60 days of the franchisee's request, at a price no lower than what he paid, less depreciation of the equipment and fittings under accounting standards and the franchisee's past accounting practice. The compensation for losses in the same article does not apply where the franchisor simply does not wish to renew or extend in the case mentioned. The franchisor may claim its damage if the franchisee terminates in breach of the law, unless the agreement says otherwise.

Article 12(2) of the Regulations requires the buy-back request to be made in writing within 60 days of the termination or of the refusal to renew or extend. This deadline is different from the period for carrying out the buy-back, which starts from the request.

In practice, prepare three separate accounts: money you paid, assets that still exist, and damage you say is linked to the breach. Attaching equipment invoices, photos and condition reports is clearer than a single total figure without detail. The party asked to pay can review these accounts and object to the source, the value or the link between the loss and the breach.

Example: a dispute over support and operation

An investor opened a café and then complained of poor training, while the franchisor said the staff did not attend the scheduled sessions. Exchanging accusations will not reveal why the branch struggled. A useful file includes the training programme, attendance records, earlier requests, both parties' replies, and what was agreed about support.

The investor could propose alternative training and clear indicators to measure improvement. The franchisor could offer a correction plan setting out each party's responsibility. If continuing is no longer suitable, they can discuss an exit arrangement covering stock, equipment and the date the business stops.

Which deadlines need attention?

Under Article 21, a claim for compensation for termination by the franchisor in breach of Article 18 is not heard after three years from the termination. A claim for compensation for breach of the law or the agreement must be brought within one year of learning of the breach or three years from when it happened, whichever comes first.

This is general information based on the official Arabic texts of Saudi laws, which prevail over any translation. It is not legal advice for your specific case.

Practical solutions for both sides

If you are the franchisee:

• Identify precisely whether this is termination by the franchisor, non-renewal, or an exit you want. Each has its own rules.
• If you receive a breach notice, fix the breach within 14 days and document it.
• Request the buy-back of assets in writing within 60 days of the termination or the refusal to renew (Article 12 of the Regulations).
• Prepare three separate accounts: money you paid, existing assets, and damage linked to the breach.
• Do not sign a release before you know which money and obligations it covers.

If you are the franchisor:

• Do not terminate before confirming a legitimate reason under Article 18, and send written notice with a period to fix the breach.
• Keep proof of delivery, disclosure, registration, training and support.
• If you refuse renewal, make sure your reason is one of the cases in Article 15, or you will have to buy back the assets.
• Discuss the franchisee's demands item by item, and propose a measurable correction plan if repair is possible.

Before going to court, both parties can consider changing some operating arrangements, a financial settlement, or transferring the business in line with the legal and contractual requirements. Ending a franchise outside the legal text is costly for both sides. Send us the contract, the notices exchanged and their dates on WhatsApp, and we will explain your position before you send or reply to any notice.