Link franchise agreement and rental agreement uncertain? – dated October 14, 2019 – mr K. Bastiaans

It is no exception within a franchise relationship that the parties agree that the franchise agreement and the rental agreement are inextricably linked, and that upon termination of the franchise agreement, the rental agreement will end without further notice being required.

A franchisor may have various reasons for linking the agreements: for example, because the location of the property is very important and the landlord (franchisor) has an interest in retaining the relevant location in the event of termination of the franchise agreement, the leased property in owned by the franchisor, the franchisor cannot lease for a longer period than for which it has the rental rights or ‘simply’ because the franchisor does not want any additional hassle if a franchise agreement ends.

Sometimes in a franchise agreement it is sufficient to note that the parties determine that the rental agreement is an integral part of the franchise agreement and that both agreements form one inseparable whole. Sometimes a franchisor also chooses to include an article in the franchise agreement stating that the parties will make every effort to ensure that those agreements are inextricable.

The pressing question that then arises is whether such a link is permitted without further ado. Looking at the legal provisions of Section 6, Title 4 of Book 7 of the Dutch Civil Code, it appears that this is, in principle, not permitted; the starting point is that the statutory provisions cannot be deviated from to the detriment of the tenant. This will only change if approval has been granted by the (subdistrict) court with regard to those deviating stipulations.

Such judicial approval can therefore only be requested with regard to clauses which deviate to the detriment of the tenant from the provisions of Section 6, according to Article 7:291 paragraph 2 of the Dutch Civil Code. Deviation to the detriment of the lessor is ‘simply’ permitted.

It is customary to submit such a request jointly. Looking at the text of Article 7:291, there is no time limit within which such a request must be made. This means that a request can also be submitted after the lease has commenced.

After submission of the request, the judicial review follows: approval is only given if (i) the clause does not materially affect the rights that the tenant derives from the department, or (ii) his social position in comparison with that of the landlord is such that he does not reasonably need the protection of this section.

Substantial infringement of the tenant’s rights

In 9 out of 10 requests for permission, the parties (or at least one party) intend to deviate from essential elements. Although deviation from such specific rental provisions can generally by definition affect the tenant’s rights, it must always be assessed per individual case to what extent that infringement is a ‘material’ infringement.

Within a franchise relationship, the request regarding the deviating rental clause mainly concerns the manner in which the rental agreement is terminated (without judicial intervention). In other words; with such a deviating clause an attempt is made to create an additional ground for termination. 

Social position of the tenant

When assessing this question, the court will take into account, among other things, the capacity of the tenant and landlord, whether the tenant has been assisted or advised by a legal adviser when concluding the lease, whether the tenant is in a dependent position with respect to from the landlord, etc.

Case histories

In February of this year, the subdistrict court ruled that the social The position of a franchisee – who is completely dependent for his income on the operation of his franchise company – compared to that of the franchisor (a franchise company with more than 30 branches in the Netherlands) is such that the franchisee has the protection of the legal provisions regarding the rental of business space is required.[1]

The stipulations for which approval was requested not only deviated from the legal grounds for termination, but also from the statutory regulation that, if there is a dispute regarding the termination of the lease, this will be reviewed by the court. According to the law, the rental agreement only ends if the court has made an irrevocable decision. This means that only then does the tenant have an obligation to evict. The exclusion of the judicial review of the termination significantly undermined the franchisee’s rights and significantly weakened his position vis-à-vis the franchisor.

No justification for such a serious infringement of the franchisee’s legal rights was neither alleged nor apparent. It was obvious that the franchisor had an interest in the greatest possible flexibility, but does not constitute a special circumstance. 

If the deviating terms result in a concrete weakening of the tenant’s position, and no justification has been given for such infringements of those legal rights, it is generally considered that approval cannot be granted. 

Conclusion

The answer to the question of whether a deviating rental clause is permissible is a case-by-case matter, which is also apparent from the judgment of the District Court of Noord-Holland earlier this year. The standard as laid down in Article 7:291 of the Dutch Civil Code contains open standards that must be filled in on the basis of the circumstances of the specific case.

The different interests in combination with the circumstances of the case mean that no unequivocal answer can be given to the question of whether permission is simply granted for deviating terms. It should be noted, however, that the central question is to what extent a tenant’s rights are fundamentally affected.

Click  here for the published article.  

mr. K. Bastiaans – franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice. Do you want to respond?

Go to bastiaans@ludwigvandam.nl