Compliance with the exploitation obligation in a mixed franchise sublease relationship

Franchise agreement, rental agreement

Many franchise agreements include a provision stipulating that the franchisee is entitled to lease the business premises from the franchisor for the term of the franchise agreement. The business premises are often rented by the franchisor from a third party. The franchisor therefore becomes a sub-lessor. An exploitation obligation is almost always included in both the main lease agreement between the franchisor and the lessor/owner of the business premises and the sublease agreement between the franchisor and the franchisee.

Unfortunately, in the current market it is increasingly common that a franchisee/sub-tenant wants to cease operation as soon as possible due to the poor financial situation, in order to avert imminent bankruptcy. He therefore wants to terminate the lease before the end of the rental period. If a solution cannot be found quickly for this franchisee, he will close his shop doors. The landlord/owner often cannot agree with the early closure. After all, he has a great interest in the fact that the rented property is actually used. A lessor/owner who is confronted with a closure before the end of the rental contract can legally enforce compliance with the obligations under the rental contract, such as the exploitation obligation. Often with success.

A franchisor cannot compel its franchisee to continue a negative operation. At the same time, it is not always possible for the franchisor to find a new franchisee directly at that location. This may be because the location does not appear to be suitable in retrospect, but also because there is simply no candidate available yet. On the other hand, the franchisor cannot be required to itself take over the operation of a very loss-making business in the leased property. There are also situations in which the business organization of the franchisor is not equipped to operate its own branch. Anyway, the rented business premises are empty.

Can the franchisor, who is confronted with an empty building, be obliged by the main lessor/owner to comply with the exploitation obligation?

In the case of Kvik NL BV, LJN: BW4608, Gerechtshof The Hague, 200.103.408/01, the Court ruled with regard to the impossibility of complying with the exploitation obligation in a mixed franchise sublease relationship after strike by the franchisee/sublessee due to economic grounds considered in summary proceedings that, in general, an order for the performance of an obligation by the debtor must come up against the inability for the debtor to perform that obligation, without prejudice to the right to compensation that may accrue to the creditor on account of the non-performance With this situation must be equated, said the Court, the case where the debtor could pay, but only by making sacrifices which, taking into account all the circumstances, could not reasonably be required of him.

The Court was therefore of the opinion that the franchisor imputably failed to comply with its obligations, but it did not order it to comply because it, the franchisor, was unable to comply. For the Court, the impossibility of compliance outweighed the obligation to comply.

In these proceedings, the franchisor also argued that it was not obliged to comply with the exploitation obligation, because the parties (main lessor/owner and franchisor) did not intend, when entering into the main lease agreement, that the franchisor would itself operate a business in the leased property and that the parties have therefore expressly included in the rental agreement that subletting to a franchisee or an affiliated company is permitted. The Court of Appeal has not ruled on this assertion because the answer to that question requires the provision of evidence and summary proceedings are not suitable for that purpose. The same applies to the question of whether, in the given circumstances, it would be unacceptable, according to standards of reasonableness and fairness, to require the franchisor to comply with the exploitation obligation.

This judgment offers prospects for the franchisor/sub-landlord who is confronted with a franchisee/sub-tenant who closes his shop doors due to financial problems, while the franchisor has no options to comply with the exploitation obligation. Naturally, the franchisor will have to demonstrate this impossibility, even in preliminary relief proceedings. Judges will not readily accept this impossibility. The main thing is that if an obligation is not fulfilled, a judgment to comply is obvious.

Ludwig & Van Dam franchise attorneys, franchise legal advice