What are a franchisee's rights and duties upon the termination of the franchise agreement? Upon termination of the franchise agreement for any reason, the rights and duties of the former franchisee are specified in the franchise agreement he or she signed.
Typically these obligations include several key steps that are essential to the franchisor and to other continuing franchisees.
- The first step is that a former franchisee should immediately cease using the logos and trademarks of the franchise system. This means that if you were a franchisee of ABC Doggie Daycare franchise, for example, you would need to remove everything showing that name and any logo, including on any signs, Yellow Pages listings, any advertisements, all stationery and brochures, etc.
- You would also have to change the decor that makes your location look like an ABC location and change any clothing that identifies your employees as part of the ABC system. If ABC was a food service franchise then any recipes and food products that were proprietary to the franchisor would also have to be removed.
- Typically a terminated franchisee will also have to pay all monies that are owed by the franchisee to the franchisor, its affiliates and to any suppliers.
- Additionally, the former franchisee would have to return all manuals and other documents which the former franchisee received during its time as a franchisee.
- Most franchise agreements today also have a non-compete clause in the franchise agreement or require franchisees to sign a separate non-compete agreement.
- Typically a former franchisee would not be allowed to remain in the same business after the franchise has been terminated or expires because the term ends.
This means that you may have a lease for your business that continues, but cannot operate the business. Often franchisors require their franchisees have Collateral Assignment of Lease provisions included in their lease so that the franchisor has the option to take over the location and run the business there until a new franchisee comes along for that territory.
This is another example of the importance of retaining experienced franchise counsel to advise a prospective franchisee prior to that prospective franchisee signing the franchise agreement.
Similarly, experienced franchise counsel should be retained to assist with any franchisee who is terminating his or her franchise agreement for whatever reason.
Nancy -
Great job with this checklist.
Franchise relationships don't last forever and having an orderly exit from the franchise requires a keen understanding of the obligations.
It's best for both the franchisee and franchisor to have plans in place when this occurs.
And for franchisors it's nice if they provide their franchisee with a guide to follow that matches the agreement.
I agree with Joe; the assignment of the lease must take place at exactly the right time unless you want the transfer to go dark - never a good idea.
Great piece Nancy, and excellent points from Joe and Michael.
Something else that is critical if the franchisee is on the lease - make certain that the assignment provides for assignment of BOTH the master lease and any personal guarantee.
We have seen a number of instances where the franchisee thinks this is automatic, or they simply forget they are guarantors. Then, as long as that lease is valid, regardless of the number of assignees, the original franchisee (as guarantor) will be liable for the obligations of any of those assignees.
Nothing worse for a franchisee than to get terminated, settle with the franchisor, then get sued two years later because another franchisee failed to pay the rent. Yikes.
Good observations about the guarantee.
Good thoughts.
As to points 5 and 6, it is worth noting that these issues vary tremendously from state-to-state, which really dials up the importance of consulting with experienced franchise counsel.
In my experience, most states will uphold franchise restrictive covenants (non-competes). They are held to a very different standard than employment non-competes. Most states view them as being entered by 2 business people and therefore will uphold them.
As far as the personal guaranty on the lease, we handle hundreds of commercial leases and we are pretty successful in having personal guarantees limited so that the franchisee/tenant is not so severely exposed.
One of the most critical issues in a lease, in my opinion, is the termination of the personal guaranty on assignment of the lease.
If the landlord accepts the assignment (all of landlords conditions are met) then there should be no reason to continue to hold the former franchisee/tenant still responsible for payments as a guarantor.
The personal guarantee should be a major concern for the franchisee.
But, it is not up to franchisor counsel to act for the franchisee.
Even when the franchise agreement is ending, the franchisee needs to be aware that there may be some remaining liability issues.
It is very unwise but altogether too common for first-time franchisees to not have their franchise agreement reviewed by a qualified franchise attorney.
This can be problematic.
But not getting advice for a franchisee's lease which very often has great deal more financial risk for the tenant/franchise than the franchise agreement unduly increases risk for the franchise venture.
Prospective franchisees should get competent advice for both the franchise agreement and the lease before executing them.
Saving money by doing-it-yourself for leases and franchise agreements is a false economy and present risks no franchise investor should take.