The concurrence of rules regarding franchise agreements and lease agreements
Introduction
The new Dutch Franchise Act has come into effect on 1 January 2021. This has consequences for the relationship between lease and franchise. With the introduction of the Franchise Act, the franchise agreement has become a so-called named agreement. Although the franchise sector is important for the Dutch economy, previously there were no specific rules for franchise agreements in the Dutch Civil Code (DCC). With the introduction of the Franchise Act, the franchise agreement has become a so-called named agreement. This has consequences for the relationship between lease and franchise.
Deviating from mandatory law
In practice, the franchisor often (also) acts as a landlord of the premises in which the franchisee operates the franchise business. In such case, it is common practice – and important – for the franchisor to link the franchise agreement to the lease agreement. This means that the parties agree that the end of the franchise agreement also means the end of the lease agreement. Upon termination of the franchise agreement, the franchisor will namely want to have the premises at his disposal again in order to ensure the continuity of the franchise formula at that location. In practice, the franchisor often (also) acts as a landlord of the premises in which the franchisee operates the franchise business. In such case, it is common practice – and important – for the franchisor to link the franchise agreement to the lease agreement (However, the inclusion of such a clause in the lease agreement circumvents the Dutch mandatory rules for the termination of lease agreements. After all, this clause means that the end of the franchise agreement also means the end of the lease agreement between franchisor and franchisee, while Section 7.4.6 of the DCC contains mandatory rules for lease termination, such as limitative grounds for termination in Article 7:296 of the DCC and minimum lease and notice periods in Articles 7:292 and 7:293 of the DCC.
Contractual clauses which derogate from the provisions of Section 7.4.6 of the DCC (to the detriment of the lessee and thus the franchisee) are voidable, unless these provisions have been approved by the Subdistrict Court. Pursuant to Article 7:291 of the DCC, a lessee (also a franchisee) and a lessor (also a franchisor) may apply to the Subdistrict Court for approval of such a deviating clause.
Approval by the Subdistrict Court
Pursuant to Article 7:291 subsection 3 of the DCC, the Subdistrict Court judges whether and when a deviating clause can be approved. Each of the parties may request such approval, and approval is given if the clause does not substantially affect the lessee's rights under Section 7.4.6 of the DCC, or if his social position compared to that of the landlord is such that he does not reasonably need the protection of the present Section. Case law shows that the court does not easily approve a deviating clause. Although case law can be described as casuistic, facts and circumstances can be distilled that play a role in the question of whether or not approval is granted, such as whether:
- the lessee/franchisee was aware of the (consequences and risks) of the clauses for which approval is sought
- the lessee/franchisee sought legal advice
- lessee/franchisee receives a financial compensation from the franchisor (for example in the form of goodwill at the end of the franchise agreement)
- a transfer or purchase option arrangement favourable to the lessee/franchisee has been included in the agreement
- the lessee/franchisee has made (large) investments, and whether these investments are put at risk by the inclusion of such clause
- where a far-reaching non-compete clause has been included in the agreement, the lessee/franchisee would be placed in a more disadvantageous situation without the deviating clause
- other benefits for the lessee/franchisee included in the agreement (so that the consequences of the clause are sufficiently compensated in another way).
The new Dutch Franchise Act
So far it is unclear whether the Franchise Act will affect the manner in which the court, on the basis of Article 7:291 of the DCC, will or will not approve a deviating clause in a lease agreement concluded by a franchisor and a franchisee. As far as we know, in 2021 no judgments have been published (yet) on the approval of deviating terms in lease and franchise agreements. Nevertheless, we expect that the Franchise Act will impact the way in which deviating clauses are accepted.
For example, the new Franchise Act contains mandatory provisions regarding goodwill and non-compete clauses in franchise agreements. Deviation from these provisions to the detriment of the franchisee are void. Therefore, it will be interesting to see how a court will deal void non-competition and goodwill clauses in franchise agreements. If the judge, ruling under Article 7:291 of the DCC, finds that the franchise agreement contains a null and void non-competition or goodwill clause, this may result in the judge granting approval to a provision in a lease agreement that deviates from Section 7.4.6 of the Dutch Civil Code sooner, or in requiring the parties to bring the contrary clause into line with the statutory requirements first.
