The great number of mergers and acquisitions in the hotel sector these past few years bear witness to a rapidly changing landscape in the hotel sector. In Europe and the Netherlands, hotel franchise formulas are gaining popularity. Well-known hotel chains like Holiday Inn, Best Western and Accor Hotels have an average of 20 to 30 independent franchise establishments in the Netherlands. In the catering sector too, the number of franchise establishments has grown sharply in the past few years. Ever more (international) fast food chains, coffee and ice cream formula stores can be seen appearing or expanding in the Netherlands. What good is the growth of franchise in these sectors to this country? Franchise chains depend on local franchisees to achieve their goals in new markets. Meanwhile, prospective franchisees wishing to operate a franchise hotel or restaurant have a wider choice than ever among franchise formulas that fit the ideas and wishes of their enterprise. If two parties eventually decide to take their chance with each other, they will conclude a franchise agreement. No specific rules apply to franchise agreements in the Netherlands as yet, but these are likely to be introduced soon.
The Franchise Bill
At the end of 2018, the franchise bill (“Franchise Act”) was published. The proposed Franchise Act aims to regulate relationships between franchisors and franchisees by law and to create a better balance in these relationships. The ‘Dutch Franchise Code’ – a self-regulatory code to be followed only by members of the Dutch Franchise Association – has existed since 2016, but has not been embraced by many franchisors. Compliance with this code cannot be enforced by the courts because of its self-regulatory nature. Are there no rules at all then for franchise at the moment? There are. Up to now, existing franchise relationships are governed by the general rules of Dutch contract law. There also is franchise-specific case law, which gives insight in the way judges apply this contract law to franchise relationships. At present, the legislator is working on the introduction of specific statutory rules for the franchise agreement.
What does the Franchise Act say?
Some rules to which both franchisors and franchisees are subject exist already at present. The Franchise Act will be introducing a set of new rules. According to the published pre-draft Franchise Act, the following rules are going to apply:
- Important information on the franchise formula has to be shared with the franchisee 4 weeks before entering into the franchise relationship. It is the franchisor’s duty to ensure that the franchisee is enabled to grasp the consequences (e.g. financial consequences) of concluding the franchise agreement. Within this four-week period, the franchisor is not allowed to change the provisions of the franchise agreement.
- The parties have to behave as a ‘good franchisor’ and a ‘good franchisee’. This means that the franchisor and the franchisee must display reasonable and careful conduct towards each other, both in the run-up to and during the franchise relationship. This is a rule that parties already have to observe now under general contract law.
- During the franchise relationship, both parties are under a continuous general obligation to inform each other about everything that is reasonably relevant for the other party. For example, their financial situation at a time when this may have consequences for the continuation of the franchise agreement.
- The franchisor has a duty of care and has to lend the franchisee assistance or support during the franchise agreement. This franchisor’s duty of care exists already now, since it was determined in several judicial rulings.
- If the franchise agreement includes a goodwill fee, the agreement should also specify how the goodwill fee is determined. If the franchise agreement ends, the franchisee must indeed be eligible for a goodwill fee.
- Sometimes the franchisee will be obliged to source goods and/or services wholly or partially from the franchisor or a party designated by the franchisor. Such a ‘purchase obligation’ will be valid only if it is a common condition in commerce within the sector concerned.
- A non-competition clause in force after the end of the franchise agreement cannot apply for more than one year, and cannot go beyond the territory within which the franchisee commercialised or was allowed to commercialise the franchise formula.
- Major policy changes in the franchise agreement that may have drastic consequences for the commercialisation of the franchise formula by the franchisee will require the approval of a two-thirds majority of the Franchise Association (which defends the interests of franchisees), or of the franchisee itself.
What is the impact of the Franchise Act on franchise in the hotel and catering sector?
A good understanding of the various rules and duties to provide information is crucial for both franchisors and franchisees. In any case, it is and will remain important for prospective franchisees to examine thoroughly what the costs and consequences will be for their own involvement and freedom of choice within such a franchise relationship. Most rules in the Franchise Act are beneficial to the protection of the franchisee. For franchise hotel and catering chains, the Franchise Act increases the burden. These chains will have to take good care to share important information with the franchisee on time when entering into a new franchise agreement, and to wait long enough before the agreement will actually be concluded. The consent of the franchisee or the Association or Council of Franchisees may be required to make changes to the policy or the formula. Moreover, the contracts of existing franchise relationships will have to be checked for rules that the new Franchise Act no longer allows. If they contain such rules, these contracts will have to be modified in good time.
When will the rules take effect?
It is not clear yet whether, and in what form, the proposed Franchise Act will take effect. Most franchisees are happy with the proposed Franchise Act. Many franchisors, law firms and franchise associations have criticized the bill (or parts thereof). The Franchise Act (in amended form, as we understand) has been under discussion by the Council of State since July 2019. The Council of State advises the legislator on the proposed Franchise Act. We will therefore have to await the Council of State’s advice. The Franchise Act is expected to be presented the Lower House of Parliament before the end of 2019. Only then will a new version of the bill be published.