If purchasing a business, what are my obligations regarding honoring gift card, etc. sold by the previous owner?
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If purchasing a business, what are my obligations regarding honoring gift card, etc. sold by the previous owner?
I bought a nail salon 2 weeks ago. The seller with sole ownership said that she on sold a 1,000 gift cards but apparently sold well over that. I only verbally agreed about honoring them but in the contract, it says that the contract superceeds any other written or verbal agreement. I found out that she knowingly sold gift cards leading up to the sale date up to 2days before closing. In addition, she sold prepaid packages of services worth thousands which wasn’t even mentioned. Do I have to honor the gift cards and the packages even if the contract protects me? She had to sign the contract which states that she must be clear of any liens, disencumbrances, loans and cannot owe anything including services.
Asked on September 12, 2015 under Business Law, Massachusetts
Answers:
SJZ, Member, New York Bar / FreeAdvice Contributing Attorney
Answered 9 years ago | Contributor
If the contract states by its terms that it supercedes any prior agreements or understandings and the contract does not require you to honor these cards, etc., then you don't need to honor them unless the business had been an LLC or corporation and you purchased the actual LLC or corporation i.e. you did not simply purchase the businesses assets. That is because if you bought the actual LLC or corporation, then the business is the same entity that issued the cards even though there is now a different owner--you--for that entity and so is contractually obligated to honor them. But apart them that, you can legally disclaim not honor the gift cards unless you agreed in the contract to honor, take over, etc. them. That's from a legal perspective from a business or PR perspective, you may wish to honor cards up to a certain dollar amount, or give hard holders discounts or credits, so as to avoid alienating prospective customers.
If you are bound to honor the cards and other packages because you bought the LLC or corporation, but the seller sold them shortly before the sale, wthout disclosing them to you, then she likely committed fraud knowingly misrepresenting or lying about material, or important facts. She also, based on what you wrote, violated the contractual term to sell the business free of any obligations or encumbrances. In this event, you could likely sue her to recover monetary compensation e.g. what you have to pay on/for the cards.
If you do not have to honor the cards, you should explain to the buyers that the prior honor sold them knowing that they were not part of the deal and that you were not taking responsibility for them, and the buyers need to look to the prior honor for reimbursement or compensation.
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