What Happens When a Franchise Agreement Expires?
A franchise is a contract agreement, and like all agreements, its term must ultimately come to an end.
Prior to a franchise agreement’s expiration, a franchisee usually has the option to renew its term. However, if the franchisee fails to meet the renewal conditions or opts to forego renewal, the agreement will expire at the end of the term.
So What Exactly Happens When a Franchise Agreement Expires?
The contract terminates. However, it doesn’t end there, the onus is now on the franchisee to fulfill its termination obligations to the franchisor.
According to 16 CFR § 436.5, a franchisor is required to disclose a franchisee’s expiration or termination obligations within the franchise agreement. Some standard post-termination clauses include:
Immediate Cessation of Franchise Operations
When your franchise agreement expires, it is incumbent on a franchisee to immediately cease all franchise operations. This means:
- De-identification: The franchisee must stop using the franchisor’s trade name and trademarks. This involves removing any signage from your place of business. Ceasing the use of any uniforms, business cards, letterheads, or other items affiliated with the franchisor.
- Return any franchisor-affiliated materials: The franchisee must return any operating manuals or handbooks, social media accounts, and online sites to the franchisor.
- Finalize Payments: The franchisee must immediately pay any outstanding amounts due to the franchisor.
Non-Competition
Your franchise agreement may also include a post-termination, “covenant not to compete,” this covenant would prohibit you from competing with the franchisor and its franchisees for a specified term after the agreement’s expiration.
For example, if you owned a seafood franchise under your agreement. A covenant not to compete could prevent you from starting a similar seafood business for a year or two after your franchise agreement expired. Now, you may be able to open a burger or Italian restaurant, so long as your new restaurant would not directly compete with your prior franchisor. However, you must complete your research to ensure your new business is not a direct competitor.
If your franchise agreement has a non-competition covenant, defaulting on these terms can make you liable for damage payments to the franchisor. Be sure to discuss this clause with a franchise or business attorney to assess its enforceability and breach implications.
Non-Solicitation
A non-solicitation clause forbids franchisees from soliciting any of the franchise customers they serviced during the agreement term.
At the expiration of your agreement, you will have to turn over your customer list to the franchisor. The franchisor will now have exclusive control of your customer list and even if you start a new non-competitive business, you would not be allowed to poach these customers due to the non-solicitation provision.
If your expired franchise agreement has a non-solicitation covenant, a franchise attorney can help you negotiate new terms with a prior franchisor to obtain access to the customer list.
Review Your Franchise Agreement
Ensure that you review your franchise agreement carefully to determine which post-termination clauses may apply to you.
If your franchise agreement has expired or will be expiring soon, contact us to discuss your post-termination obligations and rights under this agreement.