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Because the location contains the villain, the location actually remains open and all non-villain cards are banished. When you reveal the next card, all the effects trigger, including if it was a villain. I should attempt to temporarily close locations and then attempt to defeat the villain, just as if the villain were encountered in normal play.

The rules book says during setup to take the Villain card and as many henchmen cards as you need to match the number of locations, and then deal one to each location deck.