Goal and main features
The goal of the Franchise Act is to level the playing field between franchisors and franchisees. The Franchise Act aims to achieve this by strengthening the position of franchisees and increasing regulatory burdens on franchisors.
The Franchise Act may not be derogated from to the detriment of franchisees established in the Netherlands, irrespective of the law governing the franchise agreement. However, if the franchisor is established in the Netherlands and franchisee is established outside the Netherlands, derogation from the Franchise Act is allowed, even if Dutch law is applicable to the franchise agreement.
The main features of the Franchise Act can be separated into three categories:
- pre-contractual obligations;
- contents of the franchise agreement; and
- continuous obligations to provide information.
The Franchise Act introduces an obligation for the franchisor to provide information to the potential franchisee in the phase before conclusion of the franchise agreement. The Franchise Act specifies the information the franchisor needs to provide, which includes financial information on comparable franchise locations and an overview of mandatory investments. In line with current case law, the franchisor does not need to provide an estimate of the chances of success of the franchise.
All the information needs to be provided no later than four weeks before conclusion of the franchise agreement. During the four week standstill period the franchisor is not allowed to make any changes to the franchise agreement that are to the detriment of the franchisee. This allows the franchisee time to consider the terms of the franchise agreement before deciding to sign.
The contents of the franchise agreement
Goodwill: As is the case under current law, the Franchise Act still allows parties to determine whether any goodwill exists at the time a franchisor takes over a franchise. The Franchise Act, however, introduces an obligation to include rules in the franchise agreement on how parties will determine whether goodwill exists, and if so, how much and to what extent this is due to the franchisee.
Non-compete clause: Post contractual non-compete clauses must be limited in duration to no more than one year after expiration of the franchise agreement and may only apply to the sector that the franchise operated in.
Amendments: Prior consent by the franchisee will be required for certain amendments to the franchise agreement or formula. Parties may contractually limit the obligation to provide information to instances when the financial impact of a decision exceeds a certain threshold. A balance will need to be struck between the level of impact of the changes on the franchisee on the one hand and the interests of the franchisor on the other.
Continuous obligations to provide information
The franchisor will be obliged to provide annual reports to the franchisee on how certain fees, such as marketing fees, are spent. In addition, the franchisor will have to inform the franchisee of the intent to amend the franchise agreement, requested investments and other information that will likely impact the execution of the franchise agreement.
Both the pre-contractual obligations and continuous obligations to provide information will become effective immediately when the Franchise Act enters into effect. This is expected to be on 1 January 2021.
The regulations in relation to the content of the franchise agreement will become mandatory for existing franchise agreements after a two year transition period, meaning that they are likely to take effect as from 1 January 2023. Franchise agreements concluded after the Franchise Act enters into effect will have to comply with all requirements set by the Franchise Act from the get-go.
Now is the time to take action
The Franchise Act introduces many new obligations for the franchisor, some of which require amendments to existing franchise agreements. If the Franchise Act enters into effect on 1 January 2021, as is the current prediction, this does not leave franchisors much time to bring their franchise agreements into compliance. The time to act is now.