Dutch Franchise Act: the consent right of franchisees

As per 1 January 2021, the Franchise Act (Wet franchise) came into effect in The Netherlands. This Act sets out specific rules for both franchisors and franchisees when entering into a franchise agreement. The Franchise Act regulates matters in the pre-contractual phase, the contractual phase and the post-contractual phase. The Franchise Act is included in sections 7:911 to 7:922 of Book 7 of the Dutch Civil Code.

In this blog series, we will take a closer look at the practical side and interpretation of the Franchise Act. In the previous blog we focused on the pre-contractual information document (PID). In this edition, we will deepen into the franchisees’ right of consent.

Right of consent
The right of consent means that the franchisor cannot make certain amendments to the franchise formula or compete with the franchisee with a derived formula whereby the franchisee suffers financial loss without the franchisee's consent. This refers in particular to situations where the franchisor requires a certain investment, payment obligation from the franchisee or where loss of sales due to the change is to be expected for the franchisee.

Changes to the franchise formula may be of various kinds. For example, it may concern an adjustment in the type of product or service, the manner of offering or the sales model. It may also relate to the divestment of products, services or marketing (resources).

The right of consent may also apply in the event that no amendment of the franchise agreement is necessary as the franchisor has reserved the right in the franchise agreement to make unilateral changes regarding certain subjects. Such modification clauses are common in order to respond flexibly to new situations and to have the necessary leeway to develop and expand the franchise formula further. Hence, the right of consent does not aim to abolish the use of modification clauses, but only to restrict the franchisor of using such modification clauses in the event that (substantial) financial implications apply for the franchisee.

The franchisor may obtain consent in the following ways:

- from the franchisees located in The Netherlands that will be affected by the franchisor's proposed change; or
- a simple majority (50%+1) of all franchisees located in The Netherlands.

Threshold value
The franchisor only needs to obtain the consent of the franchisees for changing the formula or implementing a derived formula in the event that the investment, fee or other financial contribution required from the franchisee or expected loss of sales exceeds a certain threshold as determined in the franchise agreement. The parties may agree on how this threshold value should be specified. It may be expressed in euros or in a percentage of certain expected costs.

The threshold value is intended to serve as a framework for the franchisor's actions. This framework can help to avoid any discussions between franchisor and franchisee as much as possible. A point of attention is that the threshold amount should not be so high that the right of consent has no value. This would possibly violate the "good franchisorship" as included in the Franchise Act.

If the parties do not agree on the threshold value, then this will remain at zero and the franchisor must seek consent for any change that affects the franchisee somewhat financially. It is advisable that the franchisor agrees a realistic threshold value with its franchisees.

Franchisee representation
Franchisees can be represented through a franchise council or association. The advantage for the franchisor is that it can refer to the representative body for a consent decision.

The franchise association is formed by notarial deed and is considered as a legal entity. The main purpose of the association is to represent the interests of its members, i.e., the franchisees. The board manages the association and the members can determine the policy by voting. The by-laws may provide that certain decisions are subject to a quorum of the minimum number of members that must be present and/or to a qualified majority (66.7% of votes present representing 50% of all franchisees).

As opposed to the franchise association, the franchise council is formally not a legal entity. The franchise council has franchise regulations which states the manner in which the council functions, the subjects on which it is advised, etc. Depending on the content of the franchise regulations and agreement, it may be agreed that a decision of the franchise council is binding on both the franchisees and the franchisor.

Conclusion
The franchisor has the freedom to decide whether the proposed decision shall be subject to consent of all franchisees or only to those franchisees that are affected. If the franchisees have united in a representative body, this may facilitate and speed up the discussions on the franchise formula change for the franchisor. It is also advisable to set a threshold value in order to avoid that every intention of the franchisor to make amendments in the franchise formula has to be coordinated with the franchisees.

If you have any questions regarding the franchisees’ right of consent as governed in the Franchise Act, please contact Philip ter Burg, Susanna Tang or any of the other Buren specialists of Commercial Contracting.