The tied franchisee

By Published On: 09-01-2024Categories: Franchise Agreements

Sometimes we talk about a tied franchisee. It is important for starting franchisees to determine whether, and to what extent, the franchisee is bound before signing the franchise agreement. In short, these are provisions that may hinder the franchisee if he wishes to continue operations after the end of the franchise agreement. Some examples of this are mentioned in this contribution.

Especially in retail, a branch is an important part of the collaboration between franchisor and franchisee. The intention is to make the location an attraction for (potential) customers. In this way, regular customers can be created and the importance of the location increases. “Traffic” is then generated.

It is quite conceivable that a franchisor wants to maintain a good location for the chain of franchise stores. The potential customers know the point and the formula that is operated there. On the other hand, after the end of the franchise agreement, a franchisee may want to continue operating the relevant location under its own name or another formula. He will also want to (continue to) benefit from the accumulated traffic.

Some franchise agreements contain agreements with which the franchisor tries to maintain the location for the chain of the franchise formula. One then speaks of a “tied” franchisee. After all, the franchisee is, as it were, “stuck” to the formula and cannot simply continue operations at the location in question at will without the franchise formula. Such binding agreements could be, for example, the following:
– A post-contractual non-competition clause: The franchisee may not operate competing activities (at or near the location) after the termination of the franchise agreement;
– An obligation of the franchisee to offer: The franchisee must offer the company for sale to the franchisor in the event of a proposed cessation or sale of the operation;
– A purchase option for the franchisor: The franchisor has the right to buy the company from the franchisee after the franchise agreement expires;
– The franchisee rents the location from the franchisor, so that the franchisor, as landlord, sometimes has control over who or what happens in the rented property.

There are many variations on methods in which the franchisor can bind the franchisee. Not all bonds by the franchisor are valid. Sometimes there may be a conflict with competition law or the Franchise Act.

It is advisable to consider in advance as much as possible how any binding agreement works, to what extent it is valid and whether it is necessary to make other or alternative agreements.

mr. A.W. Dolphijn
Ludwig & Van Dam lawyers, franchise legal advice.
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