Few nightclubs are affiliated with a chain. That is quite remarkable. We see that quite a lot in the general catering industry. Especially in fast food concepts, in the hotel industry and also in restaurants. For nightclubs and pubs, perhaps traditionally most clientele is local, and therefore only local brand awareness is much more important than widespread exposure. We are now also seeing that there is increasing chain formation and an increase in the number of formulas at pubs and discotheques. This is also apparent from a Rabobank study in 2013.

Franchising cannot be ruled out in this development. Franchising is a special way of cooperation, which is not regulated by law. What are the main points of attention in franchising?

What is franchising

Franchise is the construction whereby a franchisor makes its brand and good name available to an operator of an entertainment venue, as well as, for example, a cash register system, purchasing facilities and, for example, promotional activities. The building may be owned by the operator, but in other industries it is often also owned by the franchisor.

The advantage for the franchisor will be that it can expand its organization relatively quickly and can largely transfer the business risk to the franchisee. The franchisee benefits, without excessive investments, from the name recognition of an existing formula, but also from a payment system, purchasing agreements and the knowledge to approach and serve (potential) guests as well as possible.

Reserved forecasts

A hotelier will of course want to know in advance whether the use of the franchise formula is interesting for him. It is therefore not uncommon for a franchisor to be asked for sales or profit forecasts before concluding the franchise contract. You can also think of a forecast of turnover or visitor numbers, but certainly not least profitability. It follows from case law that the franchisor is not obliged to issue a forecast. However, if the franchisor does issue a forecast, that forecast must be sound. The franchisor has an obligation to ensure that the prognosis is not too rosy, that it actually applies to the given situation, and that the correct financial figures are used as a basis. Violation of this duty of care by the franchisor may result in the franchisor being liable for damages, or even that the franchise contract appears not to have been validly concluded.

The franchisor’s duty of care

The franchisor must not only act with due care before concluding a franchise contract, but also, in particular, once the franchise contract has been concluded. The franchisor is obliged to provide adequate support to the franchisee to ensure that both parties benefit from the cooperation. It is not enough to conduct “a few conversations”. This could include investigating areas for improvement in operational management, marketing or financing. Case law shows that the franchisor has these obligations, even if they are not included in a franchise contract. This will also apply in particular if the forecasts presented by the franchisor to the franchisee are not met.

Violations of this duty of care by the franchisor can have quite a few implications. Failure to comply with the duty of care may lead to liability for damages on the basis of non-performance. Less weight can also be given to mistakes made by the franchisee. The failure to comply with a duty of care may also constitute grounds for termination of the franchise agreement by the franchisee.

Fixed prices

Potential franchisees fear that they often have no say in the pricing of entrance and drink fares. However, the law prohibits the franchisor from prescribing fixed and/or minimum selling prices. Certain advertising campaigns are excluded, whereby the franchisor temporarily, for example, prescribes a certain fixed or minimum room rate for a certain arrangement. Prescribing recommended and maximum sales prices is permitted. In practice, although the franchise contract does not prescribe fixed and/or minimum prices, the franchisee cannot do otherwise, for example because the checkout system offers no alternatives. In such situations too, pricing is prohibited.

In principle, agreements on maximum prices are allowed. However, it is conceivable that the prescribed maximum drink prices are at such a low level that they actually constitute a minimum price. After all, if the franchisee offers drinks below this maximum price, he can only have them booked at a loss. In this way, one could possibly also speak of a prohibited price agreement.

The consequence of such a prohibited agreement may be that the entire franchise agreement is declared null and void.

The end of the franchise does not mean the end of the lease

A franchise agreement can come to an end due to the passage of time, because the parties jointly decide not to continue, but more often because there is a dispute between the hotel chain and the hotelier. The franchise agreement specifies when the franchise agreement can be terminated, for example.

If the catering premises belong to the franchisor, the operator rents the building. It follows from the law that if a franchise agreement ends, this does not also mean that the rental relationship ends. The rental relationship can only be terminated by the parties jointly or by the court, even if the contract between the parties states otherwise. Under certain circumstances, a judge can give advance approval for the termination of the lease if the franchise contract also ends. This is important for the franchisor, because otherwise the catering location that it leases to the operator could be operated without the operator having to fulfill the obligations under the franchise agreement. The prior consent  of the court, is certainly not always granted.

It is very important to have a clear understanding of the implications of stipulating the franchise agreement and the rental relationship.

Other topics

Franchise law is a separate branch of sport. Other common legal aspects are those of the change in the franchise formula, or the change of the entire franchise formula. Disputes about area exclusivity and competitive activities of, for example, other franchisees with a branch nearby also occur, as do disputes about customer databases or mandatory purchasing for, for example, beverages,  facility, music, acts and automation systems.

Finally

Franchise relationships require the necessary legal attention. Franchise law as such is not regulated by law, but it does affect a number of different areas of law. Moreover, in case law the franchise agreement is seen as a special legal relationship. Specialist legal knowledge is therefore desirable.

 

Mr AW Dolphijn – Franchise lawyer

Ludwig & Van Dam Franchise attorneys,franchise legal advice. Do you want to respond? Mail to dolphijn@ludwigvandam.nl

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