European Franchise Newsletter n°38

AUSTRIA

• Franchising in Austria 2023 - An important economic sector with stable growth

FRANCE

• Franchising: the Court of cassation rules on both the intuitu personae in franchise agreements, and on the indivisibility of franchise and management lease agreements

GERMANY

• Clear rules for cancellation periods: Higher Regional Court of Celle strengthens franchisees' rights

NETHERLANDS

• Non-compliance with standstill-obligation can result in annulment of franchise agreement

SLOVAKIA

• New consumer protection rules finally adopted in Slovakia

EUROPE

• EU Design reform: a reminder of the key issues

FRANCE

Franchising: the Court of cassation rules on both the intuitu personae in franchise agreements, and on the indivisibility of franchise and management lease agreements

Cass. com. 15 May 2024, no. 22-20.747

This ruling was a long-awaited decision, and it is interesting for two reasons.

In this matter, a franchisor and a franchisee had entered into two 10-year franchise agreements in 2013 for the operation of restaurants. At the same time, a sister company of the franchisor had leased the businesses (fonds de commerce) to the franchisee to operate them under the franchisor's name. The management lease agreements were for a renewable term of one year.

The franchisor and the lessor of the businesses were acquired by a competitor in 2015.

In 2017, the lessor notified the franchisee that its management lease agreements would not be renewed upon their expiry. The franchisor then informed the franchisee that his franchise agreements had automatically terminated as a result of the non-renewal of the management lease agreements and that he was no longer part of the franchise network.

The franchisee then refused to leave the premises and brought proceedings against the franchisor and the lessor before the Rennes Commercial Court, seeking compensation for the loss he considered he had suffered because of the early termination of the franchise agreements.

The Court upheld the franchisee's claims and heavily condemned the franchisor in a decision dated 12 July 2018.

On appeal, however, in a ruling dated 29 June 2022, the Paris court of appeal overturned the judgment in its entirety and upheld the lessor's counterclaim for payment of the rent for the period after the date of non-renewal of the management lease agreements.

In its decision of 15 May 2024, the French Court of cassation confirmed the decision of the Court of appeal and dismissed the franchisee's appeal.

Two interesting points of law were addressed in this ruling:

• The scope of the intuitu personae in a franchise agreement (1);
• The question of the indivisibility of the management lease agreement and the franchise agreement when both are used (2).

1. Intuitu personae: the change of control of the franchisor does not require the agreement of the franchisees
   

As the franchisor was acquired by a third party, the question arose as to whether the franchisor had to obtain the franchisees' agreement in the event of a change of control.

Since 2008, the French Court of cassation considers that the intuitu personae is reciprocal in franchise matters (Cass. Com., 3 June 2008, No. 06-18007). In other words, the franchise agreement is entered into by the franchisor in consideration of the person of the franchisee and also by the franchisee in consideration of the person of the franchisor.

In its ruling of 15 May 2024, the Court of cassation decided that, unless otherwise stipulated, the intuitu personae relates to the legal person of the franchisor. Not its owners or directors.

The Court of cassation therefore ruled that "the transfer of all the shares in the franchisor company and the changes of its directors, which do not involve any change in the legal entity in respect of which the franchisee has entered into the agreement and which do not entail any transfer of the franchise agreement, do not require the prior consent of the franchisees, unless otherwise stipulated [in the franchise agreement]".

The Court of cassation thus confirmed the commonsense position adopted by the Paris court of appeal and refused to consider that the franchisor had committed a fault by not seeking the franchisee's consent when its shareholders and directors changed.

2.  Indivisibility of the franchise agreement and the management lease agreement

The franchisee considered that the franchisor had committed a fault by terminating the franchise agreements before the end of their terms, due to the non-renewal of the management lease agreements.

The Court of appeal considered that the indivisibility was clearly expressed in the contracts and that the management lease agreement constituted the basis for the franchise agreement, without which the latter could not be performed.

For the Court of appeal, "the fact that the lease management contract (1 year) and the franchise agreement (10 years) have different terms is lawful, regardless of the interdependence of the contracts (…) there is no conflict between the two contracts".

It concluded that "it cannot be said (...) that the franchisor wrongfully implemented the 'early termination' of the franchise agreements, regardless of the fact that the franchise agreements were entered into for a term of ten years, and that the franchisee could not be accused of any breach of contract".

Here again, the French Court of cassation approved the Paris Court of appeal and dismissed the appeal, holding that:

"The lease management agreement and the franchise agreement were intended to carry out the same economic operation and (...) the non-renewal of the first agreement did not allow the second agreement to continue being performed. The lessee was aware of the situation and the Court of appeal (...) correctly held that the lease management agreement and the franchise agreement related to the same business were indivisible, so that the expiration of the first agreement automatically led to the termination of the second agreement on the same date.”

This decision should be welcomed: by signing the contractual package, the franchisee knew that the franchise agreement could not exist without the management lease agreement, and that if the management lease agreement ceased, the franchise agreement would also automatically cease. He had therefore accepted the contractual structure with full knowledge of the facts. It should be remembered that under a management lease, the lessee takes a limited risk, since he makes little if no investment to launch the business.

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