Owning a franchise comes with many obligations. If you fail to meet your obligations as a franchisee, this can have varying consequences depending upon the specific issue and circumstances involved. Many of these obligations and consequences arise out of “non” clauses in the franchise agreement. Here, franchise attorney Jeffrey M. Goldstein explains what prospective and active franchisees need to know:
1. Non-Encroachment
If you buy a franchise with a protected or exclusive territory, you will need to respect other franchisees’ territorial rights as well. This obligation typically appears in the form of a “non-encroachment” provision in the franchise agreement. If you encroach on another franchisee’s territory, you could face consequences up to and including termination of your franchise. Conversely, if a franchisee (or the franchisor) encroaches on your territory, then you may be able to enforce your right to non-encroachment.
2. Non-Competition
When your franchise agreement ends (whether through expiration or termination), you will almost certainly be subject to a “non-competition” covenant. These covenants can vary widely in terms of their substantive scope, geographic scope, and duration. However, non-competition covenants are generally enforceable (with some exceptions), and franchisors will often vigorously enforce former franchisees’ non-competition obligations.
3. Non-Solicitation
Many franchise agreements contain “non-solicitation” clauses in addition to non-competition clauses. These clauses prevent former franchisees from contacting their customers for business-related purposes. As a franchisee, “your” customer list actually belongs to your franchisor; and, once your franchise ends, you are no longer able to use the list (even if you have it ingrained in your memory).
4. Non-Payment
One of the most common reasons for the termination of franchise agreements is “non-payment.” This includes non-payment of royalties, non-payment of marketing fund contributions, and non-payment of other amounts owed to the franchisor or its designated suppliers. While franchise agreements typically provide for “cure” periods that allow franchisees to catch up on their past-due accounts, these periods tend to be fairly short (i.e. 30 days), and figuring out a way to pay and save your franchise can prove challenging.
5. Non-Renewal
All franchise agreements contain provisions for “non-renewal.” If you are not able to meet your franchise agreement’s renewal conditions at the time of expiration, then your franchisor may be fully within its rights to terminate your franchise.
Given the risks associated with these “non” clauses, what can you do to protect yourself? If you are going through the buying process, it is imperative to hire a lawyer to review and negotiate your franchise agreement. If you are a current franchisee, you will want to speak with a lawyer to find out what options you have available under your franchise agreement and its governing law.
Questions About Buying or Owning a Franchise? Schedule a Free Consultation with Franchise Attorney Jeffrey M. Goldstein
Do you have questions or concerns about the terms of your franchise agreement? If so, you can contact us for a free and confidential consultation with franchise attorney Jeffrey M. Goldstein. To schedule an appointment at your convenience, call us at 202-293-3947 or tell us how we can help online today.
