Franchisor must take franchisee into account when determining transfer

Court of Utrecht

A standard article in a franchise agreement is the so-called transfer arrangement. This regulation stipulates the conditions under which a franchisee can transfer (the assets of) his company to a third party, for example in the event of a premature cessation of operations. Such a transfer of business generally requires the co-operation of the franchisor, who must co-operate for the legal transfer of the franchise agreement to the new franchisee.

In the case of a business transfer, the interests of the franchisor and franchisor can easily collide. After all, the franchisee has an interest in a speedy transfer of his business to a buyer, including the obligations arising from the franchise agreement, regardless of the suitability of the purchasing party. The franchisor, on the other hand, obviously has an interest in a new franchisee that is as competent as possible. The text of the transfer arrangement should therefore be clear in order to provide clarity for both parties.

The court in Utrecht recently ruled on what a franchisee can expect from his franchisor in that respect. The franchisee intended to transfer his business to a third party, but the transfer of the franchise agreement required – in accordance with a provision in the franchise agreement – the approval of the franchisor. An exploratory meeting between the franchisor and this third party followed. Apparently, the franchisor was not very pleased with this conversation, because shortly afterwards she informed the franchisee, albeit without further explanation, that she would not agree to admit the third party to the formula.

As a result of this refusal, the franchisee was therefore unable to sell his business to this third party, which caused considerable damage to the franchisee. A lawsuit followed.

According to the court, it follows from the nature of franchising that when making decisions a franchisor must not only take into account the interests of the franchisee who wants to transfer his business, but also the interests of all its franchisees. The choice whether or not to admit someone to the formula can therefore depend on business economic elements, but also on more subjective elements, such as simple trust in the entrepreneur. A franchisor therefore has policy freedom to assess who it will include as a new franchisee in its formula.

However, that does not mean that the franchisor can make any decision, because the interests of the franchisee also play a role. The franchisor’s decision to deny its consent in the present case was apparently only based on a (gut) feeling that had arisen with the franchisor during the exploratory meeting. It was therefore not based on empirically observable facts, nor on any further investigation by the franchisor into the suitability of this third party. Nor has the franchisor stated the grounds on which it considered the third party unsuitable. The court did not find this set of facts reasonable and therefore concluded that the franchisor had not acted properly.

The message of the foregoing is therefore clear; the franchisor has discretion as to whether or not to admit someone to the formula, but it may not act too lightly. That is also right, because the interests of a franchisee in this are considerable. After all, the transfer of a company without the associated franchise agreement is generally considerably less interesting for a potential buyer.

Mr JH Kolenbrander – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice Would you like to respond? Mail to coalbrander@ludwigvandam.nl