North Carolina Franchise Law: Avoid Costly Lease Disputes

Key North Carolina notes: lease terms of more than three years must be in a signed writing (N.C. Gen. Stat. § 22-2); construction upfits can trigger lien and lien-agent requirements (§ 44A-11.1); North Carolina permits reciprocal attorneys’ fees clauses in business contracts, including commercial leases (§ 6-21.6); and local officials enforce the North Carolina State Building Code (OSFM Codes).

Why franchise leases create unique risks

Franchise operations come with brand standards, site approvals, equipment needs, and operating covenants that extend beyond a typical commercial lease. If the lease and franchise agreement conflict—or if one ends before the other—the franchisee could be left with rent obligations but no right to operate the brand, or with franchise rights but no premises. Aligning the documents at the outset helps prevent expensive disputes.

Align the franchise agreement, lease, and addenda

• Obtain the franchisor’s lease rider early and incorporate it into the final lease (and ensure any later changes are written and signed; leases over three years must be in writing, see § 22-2).
• Match the permitted use with the franchised concept, and confirm trade dress, signage, and equipment are allowed by the landlord and local codes (NC Building Codes).
• Coordinate operating hours, delivery schedules, and center rules.
• Confirm exclusives, prohibited uses, and co-tenancy provisions do not block operations or future brand evolution.
• Where the franchise requires remodels or system changes, include a clear approval process and timelines so you can meet brand deadlines without breaching the lease.

Personal guarantees and risk allocation

Landlords often seek personal guarantees from franchise principals, and franchisors may require personal guaranties as well. To manage risk, negotiate limits such as caps, staged burn-offs for consistent performance, or conversion to limited guaranties after milestones. Address how the guaranty interacts with assignment and termination so personal exposure does not continue after exit. Note that North Carolina generally enforces reciprocal attorneys’ fee clauses in business contracts, including commercial leases (§ 6-21.6).

Term, options, and system timelines

Franchise agreements and leases should have compatible timelines. If franchisor renewal depends on performance and remodels, ensure the lease term and options allow time to recoup investments and complete required upgrades. Mismatched dates can leave you with ongoing rent but no right to operate the brand.

Assignment, transfers, and franchisor step-in rights

Most franchise agreements restrict transfers and require franchisor consent. Reflect this in the lease by:

• Permitting assignment to the franchisor or a qualified replacement franchisee if the franchisor exercises step-in rights.
• Coordinating landlord consent timelines with franchisor review.
• Addressing releases of guarantors upon assignment and avoiding landlord recapture provisions that would defeat a brand-approved transfer.

North Carolina law does not impose a default rule that landlord consent must be reasonable in commercial leases; if reasonableness is important, negotiate it expressly in the lease.

Build-out, permits, and code compliance

Franchised build-outs often require specialty equipment, grease interceptors, ventilation, signage, and utility upgrades. Confirm who designs, permits, and pays for base-building work. Tie critical dates to permitting realities and include extensions for delays outside your control (inspections, utility connections). Local authorities apply the North Carolina State Building Code (OSFM Codes).

Construction can create lien risk. North Carolina’s lien-agent statute may require designating a lien agent and providing notices for many projects over the statutory threshold (§ 44A-11.1). Leases often require tenant lien waivers, contractor affidavits, and proof of payment to reduce this risk.

Use restrictions, exclusives, and co-tenancy

Draft permitted use clauses broadly enough to accommodate brand updates and new product categories while staying consistent with center exclusives. If your concept depends on traffic, negotiate co-tenancy remedies and define how sales are measured and how remedies affect percentage rent. Confirm policies for third-party delivery, pickup shelving, and outdoor seating.

Maintenance, repairs, and remodel obligations

Allocate responsibility for HVAC, roof, structure, and specialty equipment. Many brands require periodic remodels; ensure the landlord’s construction rules and approval process allow timely compliance. Coordinate access rights for after-hours work.

Common causes of North Carolina lease disputes

• Default notices for rent or common area charges, and disagreements about cure periods.
• Exclusive use or prohibited competing tenants within the center.
• Assignments to new franchisees, including landlord recapture rights.
• Delays or denials of exterior signage and branding (often governed by local codes and landlord criteria).
• Responsibility for code-driven upgrades.
• Early termination after casualty, condemnation, or prolonged permitting issues.

In some commercial disputes, parties also assert claims under North Carolina’s Unfair and Deceptive Trade Practices Act; note that not every contract dispute qualifies (§ 75-1.1).

Default notices and cure opportunities

Leases typically provide notice and an opportunity to cure monetary and non-monetary defaults. Align these windows with the franchise agreement so a curable lease default does not trigger automatic termination of franchise rights. Where possible, provide the franchisor with notice and a right to cure on your behalf, consistent with any franchisor lease rider.

Non-compete, non-solicitation, and territorial covenants

Franchise agreements often restrict competitive activity during and after the term. Confirm the lease’s permitted use and landlord exclusivity covenants do not conflict with the franchise territory or post-term obligations. If the franchisor revises territories or adds channels (e.g., third-party delivery), clarify how the lease accommodates those changes. Enforceability depends on reasonableness and specific facts—seek counsel for tailoring.

Dispute resolution and remedies

Consider aligning dispute resolution provisions across documents (mediation/arbitration, forum, and law). If the franchise agreement selects a venue or governing law outside North Carolina, understand how NC law and local courts will apply to the lease. Define remedies for co-tenancy failures, exclusive-use breaches, construction delays, and landlord delivery failures. For fee-shifting, North Carolina generally enforces reciprocal attorneys’ fees clauses in business contracts (§ 6-21.6). For possession disputes, commercial landlords typically proceed via summary ejectment (Chapter 42, Article 3).

Regulatory backdrop: franchises in North Carolina

North Carolina does not have a franchise registration statute. However, franchise sales are regulated by the federal FTC Franchise Rule (16 C.F.R. Part 436). Some franchise offerings may be exempt from the North Carolina Business Opportunity Sales Act if specific conditions are met (e.g., compliance with the FTC Franchise Rule and other criteria). Always confirm applicability with counsel and review the statute (Chapter 66, Article 19).

Practical steps to prevent disputes

• Engage franchise and real estate counsel early to align lease and franchise documents.
• Attach the franchisor’s lease rider; avoid signing conflicting provisions; ensure material changes are in a signed writing (§ 22-2).
• Pre-clear signage, venting, grease, and utility needs with the landlord and local officials (NC Building Codes).
• Map critical dates for delivery, build-out, opening, remodels, and renewals, with contingency time.
• Document approvals and exceptions in exhibits and plans, not just emails.
• Use estoppels and SNDAs as appropriate to protect tenancy and financing.
• Set a compliance calendar for rent, reporting, maintenance, lien-agent notices, and insurance renewals.

FAQ

Does North Carolina require franchise registration?

No. North Carolina does not require franchise registration, but the federal FTC Franchise Rule applies, and state business opportunity laws may apply depending on the offering.

Can a commercial lease require me to pay the landlord’s attorneys’ fees?

Yes, but under N.C. Gen. Stat. § 6-21.6, fee provisions in business contracts are generally enforced on a reciprocal basis.

What if my lease term outlasts my franchise agreement?

You could be obligated for rent without the right to operate the brand. Align terms and options, and add transfer or termination rights that coordinate with franchisor requirements.

How do NC lien-agent rules affect my build-out?

Many projects require designation of a lien agent and timely notices. Confirm applicability early and follow statutory procedures to reduce lien risk.

Need help aligning your franchise lease in North Carolina? Contact our team to review your documents and negotiate protective terms.

References

• N.C. Gen. Stat. § 22-2 (Statute of Frauds: land contracts; leases > 3 years)
• North Carolina State Building Codes (OSFM)
• N.C. Gen. Stat. § 44A-11.1 (Lien agent; notices)
• N.C. Gen. Stat. § 6-21.6 (Reciprocal attorneys’ fees in business contracts)
• N.C. Gen. Stat. Chapter 42, Article 3 (Summary Ejectment)
• FTC Franchise Rule, 16 C.F.R. Part 436
• N.C. Gen. Stat. Chapter 66, Article 19 (Business Opportunity Sales Act)

North Carolina-specific disclaimer: This blog is for general informational purposes only and is not legal advice. Reading it does not create an attorney-client relationship. Laws, building codes, and lease terms vary by location and facts; consult qualified North Carolina counsel about your specific situation.