The franchise agreement is important for defining the terms of the franchisor-franchisee relationship while the franchisee has the right to operate its franchise unit. However, it is similarly important for defining the franchisee’s obligations to the franchisor if the franchise agreement expires and is not renewed or terminates prematurely.
Generally, the “post-termination obligations” owed by a franchisee to the franchisor are included in a provision of each franchise agreement. Clarifying these obligations in the franchise agreement ensures that a franchisor’s financial status, or the franchise system itself, is not unduly hindered. If you have more questions about what happens after a franchise agreement is terminated in North Carolina, speak with one of our experienced attorneys.
Because these post-termination obligations are contractual, they vary from franchise to franchise. However, some of the most common obligations that come into effect immediately upon the termination or expiration of the franchise agreement may include:
De-identification generally requires a franchisee to cease its use of the franchisor’s trade name, trademarks, and service marks, which may require, among other things, removing or covering signage, changing paint colors, ceasing use of uniforms, and other affiliation-erasing duties.
Payment of all amounts owed requires the franchisee to pay all the amounts it owes to the franchisor upon the termination of the franchise agreement. Theoretically, the absence of this post-termination obligation in a franchise agreement does not preclude a franchisor from recovering amounts owed to it by a franchisee who is unwilling to pay. However, this situation typically involves litigation, which is not always guaranteed. Therefore, it may be best to include a provision obligating the franchisee to pay all amounts owed to the franchisor upon termination of the franchise agreement, as enforcing a contractual obligation is much easier on the franchisor in the long run.
A liquidated damages provision is a good tool to enforce the franchisee’s compliance with the terms of the franchise agreement, and also allows the franchisor to recover money from franchisee in the event that the franchisee’s conduct causes the termination of the agreement. For example, if the franchisee loses a necessary license or lease, fails to comply with required business operations, or engages in any other conduct prohibited by the franchise agreement, the franchisor may terminate their contract as a result of the franchisee’s misconduct and collect money damages.
Non-competition, non-disclosure, and non-solicitation obligations ensure that the franchisee’s business ventures following the termination of the franchise agreement in North Carolina does not disrupt the franchisor’s business. These obligations ensure that a franchisor maintains control over the market that it has spent time and money to develop and precludes a former franchisee from benefiting from its knowledge of the franchisor’s system, at the detriment of the franchisor.
Lastly, it is important to impose a post-termination obligation on the franchisee to turn over its customer data to the franchisor in the event the franchise agreement is terminated. Because in practice it can be challenging to obtain this customer data, it is important to impose the specifics by which a franchisee should collect this data during the term of the franchise agreement.
What happens after the termination of a franchise agreement should be well-thought out, much like the start of the business. Neglecting to impose and adequately enforce appropriate post-termination restrictions can result in loss of brand control, costly litigation, and overall frustration to the franchisor. For those reasons, it is best practice for a franchisor to consult with its franchise attorney to discuss the best post-termination obligations that should be imposed on the franchisee in each agreement.