On June 30, 2020, the Senate of the Netherlands adopted a new Franchise Act. The act was initially passed by the House of Representatives to strengthen the position of franchises and level out the playing field. Starting on January 1, 2021, all franchise agreements are subject to the Act’s agreements which are outlined below.
The franchise agreement
So far, the franchise construction has been a form of cooperation not regulated by Dutch law. In this respect, the franchisor is often in a significantly better position than the franchisee. This is most prevalent in the case of so-called “hard-franchise formulas” carried over from the United States of America. The new Franchise Act not only regulates the franchise structure in general, but also corrects the dominant relationship between franchisor and franchisee. Spearheads of this new act are to increase transparency, participation, and rights for the benefit of the franchisee.
Key points of the new Franchise Act
- The Franchise Act regulates the pre-contractual phase and the conclusion of the franchise agreement. Among other things, it determines what information the intended franchisee should receive before he or she enters into the agreement. This includes all relevant information that the franchisor has that could influence the franchisee’s ability to make an informed decision regarding whether or not to enter into the cooperation. The franchisee must receive this information at least four weeks prior to concluding the agreement. Subsequently, during that four-week period, he has the time to reach a vetted decision. Adjusting information or conditions during that period is in principle not permitted.
- The Franchise Act recognizes that franchise structures are evolving and that the underlying franchise formulas are constantly changing. This applies in particular to relatively new franchise formulas that experience many developments in a short period of time. More often than not, the franchisee is expected to do more than what was initially agreed upon. The Franchise Act restricts such (interim) changes by making it compulsory to inform the franchisee in the event of certain changes. For example, if the franchisee is expected to invest more, the franchisor may be obliged to inform the franchisee in advance. Moreover, for larger investments, a certain threshold can be defined in the agreement. Insofar more investments are expected than this threshold, the franchisee will have to be informed.
- The Franchise Act provides that the franchisor and franchisee must consult with each other on a regular basis, and that the franchisor must assist the franchisee. It should be noted that most franchise agreements already provide for these aspects and this is therefore not new for most situations.
The termination of the franchise agreement
An essential aspect of any franchise cooperation is the termination and unwinding of the relationship. During a franchise agreement, a franchisee usually builds up a certain amount of goodwill. When settling the cooperation, however, the question is how to deal with this goodwill. The Franchise Act provides a number of guidelines on how this goodwill should be remunerated or taken over. Equally important, however, is the restriction of a possible non-competition clause. The Franchise Act stipulates that such a clause may not exceed one year, and the geographical scope of that clause may not be more extensive than the exclusive territory in which the franchisee operated. Although these obligations are usually in line with the agreements entered into and are therefore well established, for many franchisees it is a welcome addition that this restriction is laid down by law.
In conclusion, the new Franchise Act brings about a number of changes for franchisors and franchisees. Aside from taking these changes into account in January, it is also a good practice to assess existing collaborations in light of the new act.
If you have questions about the new Franchise Act or franchise agreements in general, please contact Arsen Mukychian in the Aliant® Netherland member office.