Franchising in Denmark: Set Limits on Personal Guarantees

When preparing an existing business for a franchise network, you need to decide how to manage the risk of non-payment. A personal guarantee can provide additional security if the franchisee operates through a company. However, it also exposes the owner personally to financial risk. A guarantee should therefore be a deliberate choice with clearly defined limits – not a standard clause that is only explained at signing.

Assess the need before requiring a guarantee

A personal guarantee means that an individual agrees to be liable for another party’s obligations within the scope of the guarantee. In a franchise network, for example, the owner of the franchisee’s ApS – a Danish private limited company – might guarantee the company’s payments to the franchisor. Ownership alone does not create this personal liability.

Start by identifying your specific exposure. Do you supply goods on credit? Do you finance fit-outs or equipment? Or does the risk mainly relate to ongoing franchise fees? These situations do not necessarily call for the same security.

Draw up a simple overview covering:

• The obligation you want to secure.
• The amount that could become outstanding before you identify and respond to non-payment.
• The security you already hold.
• A less burdensome alternative, such as shorter payment terms or a deposit.

Avoid requiring an unlimited guarantee simply because others do. Nor does a guarantee ensure payment if the guarantor lacks the financial means to pay. It is therefore no substitute for credit checks or ongoing monitoring of arrears.

Understand the Danish legal framework

Denmark has no specific franchise legislation and no dedicated registration scheme for franchise agreements. The franchise agreement and any associated guarantee must be assessed under the Danish Contracts Act and general principles of contract law. Freedom of contract is the starting point, but it is not unlimited. Section 36 of the Contracts Act allows unreasonable agreements to be amended or set aside following a case-specific assessment.

Depending on the nature of the relationship, the Danish Competition Act, Marketing Practices Act, Sale of Goods Act and Interest Act may also be relevant. Special rules governing guarantees given to banks cannot simply be assumed to apply to a guarantee given to a franchisor.

There is also no statutory, franchise-specific disclosure document that must be provided before the agreement is entered into. However, general principles of good faith and liability during contract negotiations may entail a duty to disclose material information. This is a further reason to explain the scope of the guarantee clearly and well in advance.

The European Code of Ethics for Franchising is self-regulation, not Danish law. Any obligations arising from membership or contractual commitments under a code must be distinguished from statutory requirements. Ask a lawyer to draft the guarantee to suit your particular payment arrangements and contractual structure.

Specify exactly what the security covers

Wording that imposes liability for ‘all amounts owed’ can create far greater personal exposure than the owner expects. Define the claims covered by the guarantee precisely. Should it cover ongoing franchise fees, supplies of goods, interest, recovery costs or claims for damages? These are different categories and should be considered separately.

Agree any financial cap as well. Make clear whether interest and costs fall within that cap or are payable on top. Otherwise, a seemingly fixed limit may be difficult to interpret.

The type of guarantee is just as important as the amount. Under a Danish selvskyldnerkaution, the creditor can generally demand payment from the guarantor once the secured payment obligation is breached. Under a simpel kaution, the principal debtor’s inability to pay must generally be established first. Explain this distinction in plain language.

If several owners provide guarantees, the document must state whether each is liable for a separate share or whether they are jointly and severally liable within the agreed limits. An internal allocation between the owners does not necessarily limit the franchisor’s claim against any one of them.

Finally, ensure that the signing arrangements clearly distinguish between the owner acting on behalf of the company and accepting a personal obligation.

Agree monitoring and release arrangements from the outset

The guarantee must remain manageable after signing. Assign responsibility for monitoring financial limits, arrears and any expiry dates. Agree how the guarantor will be notified of non-payment so that debt does not build up unnoticed.

Address changes separately. What happens to the security if the credit limit is increased, new payment obligations are added or the franchise agreement is extended? Do not assume that an existing guarantee automatically covers all subsequent changes. Have its scope reviewed and obtain fresh, express consent where necessary.

Also set out a possible route to reducing the security required: for example, an agreed review after a period of timely payments. This is an option for negotiation, not a legal requirement.

When releasing a guarantor, make clear whether the release covers all claims or only future obligations. Confirm the release in writing and ensure it is recorded by whoever handles payment collection.

Practical takeaway: Only require security you can justify. Define the claims covered, the financial cap, the type of guarantee and the release terms, and give the owner an opportunity to obtain independent legal advice before accepting personal liability.