Franchise and tenancy law

In franchise relationships, it often happens that the franchisee (sub)leases business premises from the franchisor for the exploitation of the franchise formula. In this way, the franchisor keeps control over its locations. In such a case, the franchisor and the franchisee not only conclude a franchise agreement, but also a lease agreement. Practice shows that it is important to make proper arrangements regarding the interaction between the franchise agreement and the lease agreement, so as to avoid complicated problems.

The lease agreement may be included in the franchise agreement, creating a mixed agreement, or it may be added separately as an appendix, causing the two agreements to be linked to each other. The latter is particularly common; many franchise agreements and lease agreements contain so-called 'tie-in clauses'. These stipulate that, if one agreement is terminated, this will also result in the termination of the other agreement. In this way both agreements become inextricably linked. To a franchisor, as a (sub)lessor, it is important to create such a connection between the franchise agreement and the lease agreement, for the franchisor will want to continue having the business premises at its disposal, once the franchise agreement has ended – regardless of the reason.

 

Security of tenure

On the face of it, this does not seem to be an issue, but there is an important catch, for a tie-in clause of that nature may be in conflict with mandatory provisions of tenancy law. As a lessee of a business property, the franchisee is protected by law, articles 290 f.f. of Book 7 of the Dutch Civil Code. The law provides that the term of a lease relating to a business property must be five years (with an option to extend the lease for another five years). As a result of the tie-in clause, the lease may therefore turn out to be shorter than the statutory five-year period. This is contrary to mandatory law and the franchisee or the lessee, as the case may be, will in that case have the option to have the tie-in clause declared void. As a result, the franchise agreement may have ended, but because the tie-in clause has been declared void, the lease continues. In this case, the franchisor cannot re-let the premises to a new franchisee and the former franchisee remains the lessee of the business property.

To prevent this scenario, the franchisor and the franchisee may jointly request the court to approve the tie-in clause. Briefly put, the court will grant its approval only, if the position of the franchisee or the lessee, as the case may be, will not deteriorate or if the lessee does not require security of tenure. Whereas in the past these requests were occasionally granted, the courts nowadays exercise (much) more restraint in approving such provisions. After all, the provisions for which approval is sought almost always weaken the position of the lessee.

 

Solution

Recent attempts to remedy this problem have therefore shifted to drafting the tie-in clause differently, so that in all likelihood permission will no longer have to be asked. The agreements may explicitly state that an attributable breach of the franchise agreement will also constitute an attributable breach of the lease agreement. If the franchise agreement can be terminated, it will in that case be possible to terminate the lease agreement as well.

In addition, it is often also advisable to include a (very) specific description of the intended use of the leased premises in the agreement, for example that its intended use is exclusively to operate a certain branch under the formula of the franchisor, who is also the (sub-)lessor. If, subsequently, the franchise agreement ends, the franchisee in its capacity as a lessee can no longer comply with this obligation to use the property as intended, thus enabling the lease agreement to be terminated. In this way, too, the underlying objective - i.e. maintaining the business premises as a location to be operated under the franchise formula - can be safeguarded.

Various court decisions have shown that things regularly go wrong in the franchise agreement/lease agreement combination. It is therefore advisable, when drawing up franchise and lease agreements, to enlist the help of a professional, so that such problems may be avoided.