Franchise and tenancy law

The link between franchise and rent

In many franchise models, location is crucial, and the franchisor holds a key position regarding the business premises. Often, the franchisor is the main tenant or owner, while the franchisee rents or subleases the property. This link between the franchise agreement and the lease agreement provides the franchisor with influence and security but makes the franchisee's position more vulnerable: the end of the franchise can mean the end of the lease, and vice versa. Understanding this interplay is essential for both parties.

Who do we work for?

We assist franchisors structuring lease arrangements as primary tenants or owners, and franchisees seeking to understand the strength of their position regarding the property. Additionally, we provide advice on termination, transfer, and disputes where the franchise and the lease are intertwined. The combination of franchise law and commercial tenancy law requires specialized knowledge of both fields.

Lease of business premises: the legal framework

Business premises in which a publicly accessible space is operated for the sale of goods or services fall under the special protection of Article 7:290 et seq. of the Dutch Civil Code (so-called small business premises). This regulation offers the tenant, among other things, tenancy protection through the statutory terms of five and five years, protection against termination, and the possibility of substitution upon transfer of the business. For franchising, this tenancy protection and substitution are of particular importance, as they determine the position of the franchisee with regard to the premises.

Main lease and sublease

When the franchisor is the principal tenant and the franchisee the subtenant, a layered structure arises. The position of the subtenant depends heavily on the principal lease: if the principal lease ends, the sublease is also jeopardized. At the same time, the law offers the subtenant of commercial premises protection, subject to certain conditions, upon the termination of the principal lease. The structuring of the sublease, and its alignment with the franchise agreement, determines how vulnerable or protected the franchisee is.

Substitution upon transfer

Upon the sale of the franchise business, the franchisee typically wants the buyer to also assume the lease. Article 7:307 of the Dutch Civil Code offers the lessee of commercial premises for small and medium-sized enterprises the possibility to claim substitution through the court, so that the buyer enters into the lease agreement. In franchise structures, this possibility is sometimes limited by the link to the franchise agreement and the franchisor's right of approval. The interplay between substitution, franchise approval, and goodwill is a recurring and sensitive issue.

Termination: franchise and lease simultaneously

The most sensitive moment is termination. When the franchise and lease are linked, the end of the franchise can entail the end of the lease, or vice versa. For the franchisee, this means that he may lose not only his formula but also his location, with major consequences for goodwill and the continuation of the business. For the franchisor, the linkage is precisely a way to keep the location within the formula. However, statutory tenant protection can disrupt this linkage. We assess how the termination of both agreements relates to one another.

Our working method

We assess the franchise agreement and the lease agreement in conjunction: the lease structure, protection under Article 7:290 of the Dutch Civil Code, the position regarding subletting, the possibility of substitution, and the consequences upon termination. Subsequently, we advise on the structuring, negotiations, or the course of action in the event of a dispute. For both franchisor and franchisee, we determine the actual strength of their position regarding the premises.

The linking clause and mandatory tenancy law

Practice is dominated by the so-called linking clause (also known as a linking provision): an agreement stipulating that termination of the franchise agreement automatically entails the termination of the lease agreement, or vice versa. This is attractive to the franchisor, as it allows them to keep the location within the franchise formula. However, such a clause often conflicts with mandatory tenancy law. The protection of the tenant of commercial premises is mandatory law pursuant to Article 7:291 of the Dutch Civil Code: these provisions may not be deviated from to the detriment of the tenant. A clause stipulating that the lease ends without judicial intervention as soon as the franchise ends can therefore be annulled by the franchisee, with the consequence that it is unenforceable and tenancy protection continues uninterrupted. Whether a link holds up always depends on the precise wording and the circumstances; there are differing rulings on this matter in case law.

Approval by the subdistrict court judge for a deviating clause

A deviation to the detriment of the tenant is not inherently impossible. The law offers a route: pursuant to Article 7:291, paragraphs 2 and 3 of the Dutch Civil Code, the franchisor and the franchisee may jointly request the subdistrict court to approve a deviating clause in advance. The court assesses whether the clause does not materially infringe upon the tenant's rights or whether the tenant does not reasonably require the clause. If approval is granted, the deviating or linking clause is legally valid. For parties who deliberately wish to link franchise and tenancy, this recourse to the subdistrict court is often the only way to avoid disputes and annulment afterwards. We assess whether a request for approval is likely to succeed and desirable, and draft it if necessary.

Termination of the lease by the franchisor as landlord

If the franchisor, as landlord, wishes to terminate the lease, he is bound by the limited grounds for termination set out in Article 7:296 of the Dutch Civil Code. Termination is possible, among other things, when the tenant's business operations have not been conducted in a manner befitting a good tenant, or when the landlord urgently requires the premises for his own long-term use. The mere termination of the franchise relationship is not, in itself, a statutory ground for termination. Consequently, a situation may arise where the franchise has been terminated, but the (former) franchisee remains in the premises on the basis of tenant protection, while no longer permitted to operate the franchise. This stalemate is precisely the risk that a well-considered structure, or timely approval of a deviating clause, is intended to prevent.

Franchise and lease within our broader franchise practice

The interplay between franchise and tenancy law rarely stands alone. The tenancy structure impacts the franchise agreement itself, the pre-contractual information and forecasts , and the review of contractual agreements; therefore, have your franchise contracts reviewed in conjunction with the lease. Moreover, since the Franchise Act (effective January 1, 2021), additional requirements apply to the franchise relationship, which also affect the agreements regarding the premises. Our mixed team of lawyers and in-house counsel therefore always examines your case across the full scope of Franchise Legal Advice. Whether you manage an internationally operating franchise system or operate a single location as an independent franchisee, from a large corporation to the baker on the corner: we translate the legal interplay into a workable choice for your situation.