Legal obligations of the franchisor

The obligations of the franchisor under the Franchise Act

The Franchise Act, in force since January 1, 2021, has significantly regulated the relationship between franchisor and franchisee. The focus of the Act lies on the obligations of the franchisor, which are mandatorily established on a number of points to protect the franchisee. For the franchisor, this means that the formula, the agreement, and the working methods must comply with these obligations, under penalty of nullity of clauses, claims, or disputes. For the franchisee, these obligations provide points of reference to enforce compliance.

Who do we work for?

We assist franchisors who wish to correctly fulfill their obligations and assess their formula and agreement against the Franchise Act, as well as franchisees who want to know whether their franchisor is complying with legal obligations and what they can do if they are not. Our role varies by position, but the basis is always a thorough assessment against the mandatory provisions of the law.

The pre-contractual duty to inform

The franchisor must provide the prospective franchisee with a series of information in a timely manner, and at least four weeks before the conclusion of the agreement (Article 7:913 of the Dutch Civil Code), including the draft agreement with annexes, information regarding financial obligations and investments, the manner and frequency of consultation, information regarding any derivative formula, and available information regarding the financial position of the formula. The information must be accurate and complete. Violation may lead to misrepresentation or damages.

The standstill period

The franchisor must observe a standstill period of at least four weeks between the provision of the information and the conclusion of the agreement (Article 7:914 of the Dutch Civil Code). During this period, the agreement may not be concluded, may not be amended to the detriment of the prospective franchisee, and the franchisor may not induce the prospective franchisee to make investments or payments related to the agreement.

The duty of care and the annual consultation

During the term of the agreement, the franchisor must conduct itself as befits a good franchisor (Article 7:912 of the Dutch Civil Code) and provide the franchisee with the assistance and information that is reasonably necessary. In addition, the law requires the franchisor to consult with the franchisees at least once a year (Article 7:919 of the Dutch Civil Code). These obligations shape the entire relationship and are relevant to the question of whether the franchisor's decisions will stand up later.

Right of consent, goodwill and non-competition

For substantial changes to the formula and for the introduction of a derivative formula, the franchisor requires the consent of the franchisees under certain conditions (Article 7:921 of the Dutch Civil Code). At the end of the agreement, there must be a goodwill arrangement that complies with Article 7:920 of the Dutch Civil Code. Furthermore, a post-contractual non-compete clause must remain within the strict limits of Article 7:920 paragraph 2 of the Dutch Civil Code. These obligations significantly restrict the franchisor's freedom of action and require careful structuring of the agreement.

The consequences of non-compliance

Provisions in the franchise agreement that deviate from mandatory legal protection to the detriment of the franchisee are void or voidable to the extent provided by law. Violation of pre-contractual obligations may lead to error or damages. An amendment without the required consent shall not stand. For the franchisor, compliance is therefore not optional: non-compliance directly affects the validity of the agreement and the position vis-à-vis the franchisees.

Our working method

For franchisors, we review the formula, the agreement, and the working methods against legal obligations and advise on adjustments to ensure compliance. For franchisees, we assess whether the franchisor is adhering to its obligations and determine the consequences if it is not. In the event of a dispute regarding compliance, we determine the most effective course of action.

Ongoing obligation to provide information and cost coverage during the term

In addition to the pre-contractual duty to provide information, the franchisor is subject to a continuous duty to provide information during the term of the agreement (Article 7:916 of the Dutch Civil Code). The franchisor must inform the franchisee in a timely manner about intended changes to the agreement, about investments he requires from the franchisee, about any intention to operate a derivative formula, and about all other information of which he knows or can reasonably assume that it is of importance to the franchisee. Of particular note is the obligation to provide annual insight into the extent to which the fees paid by the franchisee have covered the franchisor's costs and investments for the benefit of the formula. This transparency regarding cash flows is, for many franchisors, one of the most underestimated obligations under the law.

The threshold for the right of consent

Modifying the franchise formula or introducing a derivative formula requires the consent of the franchisees under Article 7:921 of the Dutch Civil Code, but only when the financial consequences for the franchisees exceed a threshold value stipulated in the agreement. In practice, this creates a significant area of ​​tension. If no threshold value has been agreed upon in the contract, consent is required for any change with financial consequences, no matter how minor those consequences may be. If a threshold is agreed upon, it may not be so high that the right of consent becomes illusory, as this would be contrary to sound franchisor practice. Case law shows that a change implemented without the required consent can be annulled by the franchisee. Carefully establishing a realistic threshold value is therefore a key point when drafting the agreement.

Transitional law: existing agreements since 1 January 2023

For agreements that were already in effect when the Franchise Act entered into force on 1 January 2021, a two-year transitional period applied to three subjects. Since 1 January 2023, existing franchise agreements must also comply with the law regarding these points: the goodwill provision (Article 7:920 of the Dutch Civil Code), the post-contractual non-compete clause (Article 7:920 paragraph 2 of the Dutch Civil Code), and the right of consent (Article 7:921 of the Dutch Civil Code). Clauses that deviate to the detriment of the franchisee regarding these points have been voidable since that date and, where applicable, void. A franchisor who has not amended their old agreements runs the risk that their non-compete clause or goodwill provision will not hold up. We advise franchisors with portfolios of older contracts to have them checked for compliance.

Enforcement and disputes regarding compliance

The franchisor's obligations are not mere paper rights for the franchisee. If an obligation is breached, various avenues are open to the franchisee: demanding performance, annulling a modification implemented without consent, dissolution, or compensation. Furthermore, a breach of the pre-contractual duty to provide information may lead to a claim of error. For the franchisor, this means that a dispute regarding compliance can easily affect the validity of the agreement or a modification. We assist both franchisors and franchisees in conflict resolution regarding these obligations and determine the most effective course of action for each situation, whether through an amicable settlement or legal proceedings. In this regard, the franchisor's obligations serve as the mirror image of the franchisee's statutory obligations.

Review obligations with a franchise specialist

The franchise practice at MKB Juristen consists of mixed teams of lawyers and in-house counsel. This enables us to assist both international corporations with hundreds of branches and individual entrepreneurs—ranging from national retail chains to the local baker considering a franchise—with their statutory obligations as franchisors. We review franchise formulas and agreements against mandatory legal provisions, draft compliant agreements, and conduct legal proceedings where necessary. This page is part of our broader expertise in Franchise Legal Advice, within which we guide franchisors and franchisees across the full spectrum of franchise law.