Article Franchiseplus: “Divide the pain” – mr. Th.R. Ludwig – dated December 1, 2020

The corona crisis has brought many franchisors and franchisees into serious business problems. Revenues fell and are falling away, while costs continue. Faced with these difficulties, parties sometimes need to recalibrate, or even reinvent, their franchise relationship.

This involves looking at alternative forms of business, such as (intensification of) home deliveries in the hospitality industry, but also at reducing rental and fee obligations and other financial burdens, such as repayment obligations with the bank and/or the tax authorities. Proper and careful consultation between the parties involved is then a prerequisite for reaching good agreements. The question is how legally responsible the (suddenly) arising disadvantage should be dealt with. A question that the court has now also considered.

Legal framework

In the meantime, a line has developed in the case law in this context. A division of the disadvantage in half over the parties as a result of the corona crisis is now accepted by the court as a practical starting point, with the principle of ‘share the pain’ being endorsed by several courts, as recently stated by the Amsterdam court in preliminary relief proceedings: “Now neither party can be blamed for the cause of the unforeseen circumstances, it is obvious to divide the resulting financial loss in advance. The agreement does not give rise to a special risk allocation”.

In this respect, force majeure or unforeseen circumstances may be invoked, if it cannot reasonably be expected that unchanged maintenance of, for example, a franchise or rental agreement is feasible. There must be a serious imbalance of the contract. It is important to state with reasons what effect the corona crisis will have on business operations.

(Sub)rent

For example, it is important to see whether a leased property can still be operated in the manner intended, now that making it available may have lost its meaning due to closure; after all, the rental property can no longer be used or can only be used to a limited extent. If this is the case, a reduction of 50% may be plausible. In that case, there is a serious disturbance of the balance of the lease. If any take-away and delivery of meals from the same building has increased considerably, this can again nuance the request for rent reduction. For example, it was recently ruled in court that suspension of the rent by 50% will be justified, until it has been decided in any proceedings on the merits whether the suspension can be maintained (in the longer term) and/or whether there can be partial remission.

There is also a serious relevant disruption if the costs have risen sharply, making it impossible for a franchisee, for example, to be able to sell its product for a competitive price any longer. This may, for example, be the result of sharply increased purchase prices or the need to incur additional costs, such as installing screens and other hygiene measures. As a result, the franchisee can get into such trouble that he can no longer properly meet his obligations. This does not only have to relate to the rent, but can also, for example, relate to the franchise fee or other obligations. In all those cases, a reduction can be justifiably considered.

Franchise fee

With regard to the franchise fee, it must also be considered whether this is still the same service. After all, if only limited use can be made of the franchise formula, there will be a serious imbalance within the franchise agreement. Suspension may then also be indicated. Please note: the law sets various requirements for suspension, it is important not to do this just like that. Furthermore, there may be an alternative interpretation of services by the franchisor that may be expected on the basis of the franchise fee. For example, in accordance with its duty of care, a franchisor can make extra efforts to realize rent discounts for its franchisees, or develop alternative services, such as (intensifying) home deliveries.

A justified appeal to force majeure and/or unforeseen circumstances can only succeed after careful consultation between the parties. No commercial side benefit may be pursued, but the franchisor, franchisee, lessor, bank, supplier and other stakeholders must actually share the pain.

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