Sweeping Franchise Law Changes Coming.

On Jan. 1, 2021, the new Franchise Act will go into effect. The purpose of the new law is to make the relationship between the franchisor and franchisee more balanced. With the enactment of the Franchise Act, many franchise agreements will have to be reassessed and renegotiated. It therefore requires an adjustment of procedures and agreements of both existing and future franchise relationships. Especially in industries where franchise formulas are frequently used, such as DIY stores and construction wholesalers, it is important to be aware of the consequences of the new law. In this way, the coming changes can be taken into account at an early stage and new negotiations can be conducted with the right approach.

In this article, Valerie Lipman and Joost van Dongen, both attorneys at Poelmann van den Broek attorneys, briefly discuss the main four main themes of the new Franchise Act.

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1. The franchise relationship

The new Franchise Act introduces basic principles such as "good franchisor" and "good franchisee. This principle is important both during the run-up to any franchise relationship (the so-called pre-contractual phase), but also once the agreement has been concluded. The basic principle is that the parties act toward each other with reasonableness and care. The moment the interests of the franchisor and franchisee clash then the conversation should be entered into to reach a mutually satisfactory solution. Consideration for each other is therefore important. The franchisee must also adopt a constructive attitude in such discussions. For example, a franchisee of a DIY chain should consider the interest of the entire franchise chain in addition to his own interest.

2. Disclosure

A common problem in current franchise relationships is inadequate disclosure of information both prior to and during the term of the franchise agreement. The Franchise Act strengthens the information position of the franchisee in particular. The Act lists subjects about which a franchisee must, in any case, be timely and specifically informed. This means, therefore, that the procedure prior to the conclusion of a franchise agreement must be adapted and a close look at what information must be provided. The provision of information is not entirely one-sided. Franchisees must also provide franchisors with disclosure about their financial situation. In this way, a franchisor can take stock of whether necessary investments can be met.

If a franchisor of a DIY chain engages in discussions with a potential franchisee, then under the new Franchise Act it is required to provide historical financial location information, to the extent that it should reasonably be available. Providing expected sales or operating results to the potential franchisee, by the way, is not mandatory. Once all relevant information has been received by the parties, there is a statutory four-week period for consideration. During that period, the draft franchise agreement may not be amended to the detriment of the franchisee. Also, during those four weeks, prior to the intended signing of the agreement, no investments or other payments in view of the upcoming franchise relationship may be requested from the franchisee, among other things. The potential franchisee should use this time to fulfill its obligation to investigate and seek expert advice where necessary.

3. The franchise agreement

The Franchise Act further imposes a number of requirements on the content of the franchise agreement. These include topics on which disputes often arise in practice, such as compensation for goodwill upon termination of the franchise relationship and the non-compete clause. For example, franchise agreements must include a provision regarding compensation of accrued goodwill by the franchisee.

In addition, non-competition clauses that are formulated too broadly are prohibited. This is because the effect may be to unduly restrict the franchisee from carrying out certain activities after the end of the franchise relationship. The introduction of the Franchise Act will limit the effect of such non-compete provisions to what is necessary to protect know-how, to competitive goods or services, to a period of one year after the end of the franchise agreement and the geographic area within which the franchisee was permitted to operate the formula. As a result, many existing non-compete clauses will have to be rewritten.

4. Consultation and consent

The Franchise Act also provides for regulations regarding consultation. Various provisions seek to optimize the coordination of activities between franchisor and franchisee. This consultation is also the prelude to consent by franchisees when the franchisor wants to introduce changes in the franchise formula, which has or may have certain financial consequences for the franchisee. Predefined thresholds should be used to determine whether franchisee(s) consent is required.

Consideration can be given to house brands (for example tools, building materials or paint) developed by the franchisor that are also offered at other stores (outside the franchise formula). The moment it is established that the financial consequences will be considerable for franchisees, consultation and (depending on the agreements made) consent for such actions is required.

In conclusion

The Franchise Act contains a range of sweeping changes for both franchisor and franchisee. The law may take effect as early as Jan. 1, 2021. As of that date, franchisors and franchisees will have to comply with the Franchise Act. This means that many procedures and agreements will have to be revised. For existing franchise agreements, some provisions are subject to a two-year transition period. These include the provisions on goodwill, the non-compete clause and the consent requirement for changes to the franchise formula. Provisions in existing franchise agreements that deal with these topics must comply with the Franchise Act within two years of its enactment. If they are not? Then the parties will have to sit down and negotiate new agreements that do comply.

Do you have questions about the franchise changes? Or would you like advice on the impact of the changes on your franchise formula? If so, please contact Valerie Lipman or Joost van Dongen.