Termination of the franchise formula and end of subletting

Court of Appeal of The Hague 16 July 2013, ECLI:NL:GHDHA:2013:3720

Termination of the franchise formula and end of subletting

Can the franchisor – without being liable for damages – discontinue the franchise formula and also terminate the rental relationship with the franchisee, whereby the franchisor continues with a web shop?

A franchisee operates a drugstore formula in a business space sublet from the franchisor.  The sublease agreement stipulates that the franchise agreement also ends with the termination of the rental relationship. A zoning clause has been included, entailing the obligation to use only the formula of De Boer Drogisterijen in the rented property.

The franchise agreement includes, among other things, the obligation of the franchisor not to compete with the franchisee or to have it compete. The franchise agreement also provides for the possibility of termination and stipulates that the franchisor may terminate if continuation cannot reasonably be expected of it.

Apparently, at some point another organization will become the franchisor/sub-lessor, namely Trekpleister BV, which is the franchisor of the Trektrekker formula. The franchisee will operate the Attraction formula in the rented property. In 1997, the shares in Trekpleister BV were also transferred to another organisation, which meant that the  sublease agreement comes into the hands of a party that, in addition to being the franchisor of the Trektrekker formula, is also the operator of the Kruidvat drugstore formula. From that moment onwards, the Kruidvat formula and the Trekpleister formula belong to the same group. Kruidvat Retail BV becomes the franchisor and sub-lessor of the franchisee who operates the Trekpleister formula.

By registered letter dated May 18, 2006, Kruidvat Retail BV terminated the franchise agreement as of November 7, 2010. The letter concludes with the announcement that the sublease agreement will also end with the end of the franchise agreement. In a letter dated 26 July 2006, Kruidvat Retail BV terminated the main lease agreement with the main lessor as of 7 November 2010. On 7 November 2010, the franchisee/sublessee vacated the rented property under protest. Apparently Kruidvat Retail BV wishes to leave the location.

The question that was submitted is whether the franchise agreement could be terminated. Kruidvat Retail BV has stated that it has decided to discontinue the Trekpleister formula for strategic and business economic reasons. According to the Court, as an entrepreneur, a franchisor has the right to make such a choice. It is undisputed that the cooperation with all other franchisees has already been terminated. The franchisor cannot be expected to continue the franchise formula exclusively for the benefit of the franchisee in question, not even if this in itself would require little effort. According to the Court, the franchisor has also taken sufficient account of the interests of the franchisee by observing a very generous notice period of approximately 4.5 years.

Now that the franchise agreement has been terminated, the question arises whether the franchisor could terminate the main lease. The franchisee apparently pointed out that the franchisor should not and should not have terminated the sublease agreement because that would tip the balance of interests of Section 7:296(3) of the Dutch Civil Code in favor of the subtenant. The Court ruled otherwise and considered, among other things, that the sublease ultimately lasted about 15 years. According to the Court, it is generally assumed (and in this case has not been contradicted with sufficient reasons) that investments made can, in principle, be recouped in 10 years. Furthermore, it has not been (sufficiently) contradicted that (sub)letting of business premises by Kruidvat Retail BV  to any third party, other than a franchisee, is not part of the activities of the franchisor. Remarkable is the Court’s consideration that the destination clause included in the lease agreement (to use the leased property in accordance with the formula indicated in the franchise agreement) is impossible for the franchisee to comply with. Although the sublease agreement in that respect refers to the formula of De Boer Drogisterijen, the Court of Appeal ruled that the Trekpleister formula can be read here. After all, a reasonable explanation means that from 1997 onwards instead of the formula of De Boer Drogisterijen, the Trekpleister formula should be read, according to the Court. The zoning clause is therefore filled in by the Court on the basis of years of actual use. In short, the sublease agreement must also end.

The franchisee  also accuses the franchisor of not properly fulfilling its obligations under the franchise agreement and of acting in violation of, among other things, the non-compete obligation of the franchisor. Apparently it refers to the opening  of a Trekpleister internet shop. The Court ruled that in that context the non-compete obligation only pertains to a branch and that a web shop can hardly be regarded as a branch.

The claims for damages from the subtenant/franchisee are also rejected, apparently now that the obligation to limit damage has not been met. The Court reproaches that it has not been argued or shown that an attempt was made to request substitution from the main lessor, nor that there was anything in the way of concluding a new lease directly with the main lessor.

All in all, a judgment that puts the franchisee in the wrong on all fronts, although the Court rules that termination of the sublease agreement cannot be established with retroactive effect. The Court therefore terminated the lease on the date of the judgment. However, the franchisee had already vacated the sublease, so that it cannot take advantage of this. The question is what the outcome of the procedure would be if the franchisee had not vacated the leased property by 7 November 2010. Perhaps the franchisee could then have taken a stronger legal position.

Mr AW Dolphin  – Franchise attorney

Ludwig & Van Dam Franchise attorneys,franchise legal advice.

Do you want to respond? Mail to dolphijn@ludwigvandam.nl