The bankrupt franchisor: set off claims under the franchise agreement against rents owed to the trustee

This section has previously written about “franchisor in difficulties” and, following on from that, “What to do if the bankruptcy is a fact?”. In this contribution I would like to discuss in more detail the possibilities of settling claims in bankruptcy. More specifically, the possibility of set-off of claims under the franchise agreement by the franchisee against what that franchisee owes to the trustee of a bankrupt franchisor under a commercial lease agreement entered into between that franchisee and the franchisor.

The case: Franchisor and franchisee have concluded a franchise agreement and a lease agreement for business premises. Both agreements are linked, in other words the rental agreement depends on the franchise agreement. At any time, the franchisor has failed to fulfill its obligations under the franchise agreement. As a result, the franchisee suffers damage for which he has held the franchisee liable. Ultimately, the franchisor is declared bankrupt. The franchise agreement was not automatically terminated by the bankruptcy. After the bankruptcy date, the franchisee continues to lease and use the business premises. From the date of bankruptcy until the date on which the lease is terminated, the franchisee owes rent to the trustee. The rent is from the date of bankruptcy and estate debt. The trustee wants to collect the rent from the bankruptcy date. The franchisee invokes the settlement of its claims (from before and after the bankruptcy date) under the franchise agreement against the bankrupt franchisor against the rents owed (to the trustee).

In my opinion, based on the law and various case law, this means in our case that it is very well defensible that the franchisee’s claims, regardless of whether they date from before or after the bankruptcy date, can be set off against the bankrupt’s debts. and from the date of bankruptcy the trustee, rent installments due. However, it is essential for this that it can be judged that the rights of action under the franchise agreement are related to the rental agreement. Since in our case both agreements are linked to each other, the connection has been established.

In my opinion, the franchisee can set off his claim against the rental obligations, because there is a connection between the franchise agreement and the rental agreement, which connection is expressly confirmed in the agreements.

On behalf of the franchisee, I will therefore enter into a discussion with the trustee and adopt the aforementioned position on behalf of the franchisee.

Ludwig & Van Dam franchise attorneys, franchise legal advice