Franchise Act

The pre-contractual exchange of information

The Franchise Act imposes extensive obligations to provide information on the franchisor. Prior to the conclusion of the franchise agreement, the franchisor must provide the prospective franchisee with all the information of which the franchisor knows or might reasonably suspect that it will be relevant to the franchisee’s decision whether or not to enter into the franchise agreement. For example, the franchisor is under an obligation to provide historical (financial) information on the location, to the extent that such information is reasonably available. According to the explanatory memorandum to the Franchise Act, this obligation does not include providing a forecast.

The franchisee is likewise under an obligation to provide information. Among other things, the franchisee must disclose its financial situation, thus enabling the franchisor to assess whether the franchisee is capable of making the necessary investments.

Read more about the pre-contractual exchange of information here.

 

Obligation to provide information during the term of the franchise agreement

During the term of the franchise agreement, the franchisor must provide all the information of which it knows or can reasonably suspect that it will be relevant to the performance of the franchise agreement. In that context, the franchisor shall in any case inform the franchisee in good time about:

  • any proposed amendments to the franchise agreement;
  • any investments the franchisee is required to make;
  • a decision to use a derived formula, provided with an overview of the contents and the essence of this formula;
  • a decision to use the financial contributions paid by the franchisees for a specific purpose.

The franchisor must provide all information in such a manner as will cause it to be and remain accessible to the other party for the period for which the information has been provided. The information must furthermore have been phrased and presented in a manner which is clear, understandable and unambiguous for the average franchisee in terms of the relevant franchise formula.

 

Consultations and consent

Consultations must be held between the franchisor and the franchisee at least once a year. The franchisee furthermore has a right of consent in the event that the franchisor wishes to change the franchise formula or operate a derived formula without amending the franchise agreement and if the franchisee, for that purpose:

  • is required to make an investment;
  • has to pay a fee, a surcharge or any other financial contribution;
  • has to incur costs of a different nature; or
  • suffers a loss in sales.

This right of consent means that the consent is required from either a majority of the franchisees established in the Netherlands or from each of the franchisees established in the Netherlands who are in any way affected by any of the above-mentioned consequences. The franchisor determines which procedure of providing consent applies.

In order to avoid that the franchisor also needs to obtain the consent from the franchisees for changes with a slight (negative) impact, the franchise agreement may contain thresholds. In that case, the franchisor will require the franchisees’ consent only, if the proposed adjustments exceed the thresholds in financial terms. The level of the thresholds should be determined prior to the conclusion of the franchise agreement.

 

When determining the level of the thresholds, the franchisor must also take another statutory provision into account. Article 912 of Book 7 of the Dutch Civil Code provides that the franchisor and the franchisee must behave towards each other as a good franchisor and a good franchisee. If the franchisor sets the thresholds at such a high level as to cause the right of consent actually to be circumvented, the court may rule afterwards that the franchisor in question has not acted as a 'good franchisor' on this point. This may have far-reaching consequences. It is therefore recommended that different thresholds should be used, that the level of the thresholds is carefully considered and that support is also created among the franchisees. After all, the franchisees will equally benefit from a formula that is flexible and to which interim adjustments can be made without too many obstacles being raised. When creating this support, it may ‘help’ to be transparent and to involve the franchisees (or their representatives) in the process of implementing a certain change at an early stage, even if the financial impact is likely to remain within the thresholds. Transparency and support may prevent unpleasant discussions afterwards.

 

Non-compete clause

The post-contractual non-compete clause prevents the franchisee from engaging in certain competing activities after the franchise relationship has ended. The scope of such a clause is limited to:

  • what is essential in terms of the protection of know-how, competing goods or services;
  • a period not exceeding one year after the expiry of the franchise agreement; and
  • the territory within which the franchisee was allowed to operate the formula.

 

Goodwill

The franchise agreement must provide for the way in which it is determined whether there is goodwill in the franchisee’s business operations, what its scope, if any, is and to what extent the (accrued) goodwill can or cannot be allocated to the franchisor. If goodwill can be allocated to the franchisee, the franchise agreement must also provide rules for dealing with payment of this goodwill fee to the franchisee upon termination of the franchise agreement. The latter only applies, if the franchisor wishes to continue the franchisee’s business independently or by transferring it to a new franchisee. In short, it must be clear to the franchisee whether any goodwill is present and, if so, how it is determined.

For the purpose of this provision too, ‘acting as a good franchisor’ may play a role. After all, the franchisor can draft the franchise agreement contractually and/or factually in such a way that the goodwill present in the business, of which it is evident that a significant part is to be allocated to the franchisee, nevertheless fails to be paid out to the franchisee, for example, by using a right of first refusal, in combination with a provision on the allocation of the goodwill, or by using a right to reject certain takeover candidates. In such cases too, the injured franchisee may decide to invoke the provision that the franchisor must act as a ‘good franchisor’.

 

Mandatory law

The Franchise Act is mandatory in nature and applies to all franchisors whose franchisees are established in the Netherlands. It is not permitted to derogate from the provisions as contained in the Franchise Act to the detriment of these franchisees. An exception is made for franchisees who are not established in the Netherlands. With respect to this group of franchisees the Franchise Act may be derogated from, even if the franchisor is established in the Netherlands and/or Dutch law has been declared applicable to the franchise agreements.

 

Transitional law

As of 1 January 2021, all franchisors and franchisees must conform to the Franchise Act. Franchise agreements too must satisfy the requirements of the Franchise Act. Until 1 January 2023, a transitional period applies to existing franchise agreements with regard to articles 920 and 921 of Book 7 of the Dutch Civil Code, in which articles the right of consent, the rules on goodwill and the non-competition clause are provided for. With respect to the ‘existing’ franchise agreements, the franchise organisations will thus be given a two-year period to amend their franchise agreements. This transitional regime does not apply to franchise agreements concluded as from 1 January 2021.

Franchisors should be aware that this transitional regime does not apply to existing franchisees who renew their franchise agreements. If the commencement date of the renewed agreement is on or after

1 January 2021, the Franchise Act will apply in full. If the renewed franchise agreement has not been adapted to the Franchise Act, the franchisor even runs the risk of the renewed franchise agreement being ruled void or voidable afterwards.