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.
