Aligning the Lease and Franchise Agreement

Your existing business has a suitable location, but for your first franchisee, the search starts afresh. Attractive premises are only viable if the lease terms fit the franchise agreement. Otherwise, someone could be left paying rent after the franchise relationship ends, or lose the premises while the franchise agreement is still in force. A healthy franchise network therefore needs clear arrangements covering these two separate obligations.

1. Decide carefully who will lease the premises

When expanding, you can let the franchisee lease directly from the property owner. Alternatively, you can take on the head lease yourself and sublet the premises to the franchisee. Neither option is automatically better.

Under a direct lease, the franchisee is responsible to the owner for meeting the lease obligations. As the franchisor, you do not automatically have the right to take over the premises when the relationship ends. If you want to retain the location for the franchise network, discuss a possible takeover arrangement with everyone involved in advance.

Subletting gives you more control over the location, but also exposes you to risk. If the franchisee leaves, your obligation to pay rent as the head tenant will generally continue. You should also check that subletting and the intended use are permitted.

Before choosing premises, draw up a short list of responsibilities:

• Who pays the rent, service charges and deposit?
• Who pays for maintenance, alterations and reinstatement when leaving?
• Who bears the risk of the premises standing empty?
• Who negotiates with the owner over renewal or transfer of the lease?

Discuss this allocation of responsibilities with your accountant too. Taking on a head lease can significantly constrain your existing business’s financial flexibility.

2. Establish which tenancy rules apply

Not all commercial premises are subject to the same tenancy rules. In the Netherlands, many shops, hospitality businesses and craft businesses with premises open to the public fall under Article 7:290 of the Dutch Civil Code. These generally have a five-year lease term followed by a further five years, with statutory tenancy protection. There are exceptions, including special rules for leases of up to two years.

Many office premises, for example, fall under a different regime: Article 7:230a of the Dutch Civil Code. Here, the main protection concerns eviction after the lease ends. This is not the same as the protection available for retail premises.

The actual circumstances and agreed use matter; the label on the lease is not decisive. Have the applicable regime established before signing.

This distinction determines how much freedom you have to link the lease to the franchise agreement. A clause stating that the lease ends automatically when the franchise agreement ends will not necessarily be effective. For premises with statutory tenancy protection, clauses departing from the statutory rules may require court approval. Have a specialist review these provisions, including in a sublease.

3. Compare all the key dates

Create a single timeline showing the start date, term, renewal dates and notice periods for both agreements. Add the planned dates for handing over the keys, fitting out the premises and opening. Look beyond the first contract year to the earliest point at which either agreement could end.

A five-year franchise agreement, for example, does not automatically align with a retail lease that includes a second rental period. Nor does terminating the franchise agreement mean that the landlord releases the tenant from their obligations.

Discuss at least three scenarios:

1. The franchise ends, but the lease continues. Can the business owner start another permitted activity or propose a replacement tenant?
2. The lease ends, but the franchise continues. Is relocation possible, and who pays to adapt the new premises?
3. The opening is delayed. When do rent and franchise fees become payable, and what happens if a required approval has not been obtained?

Turn the answers into specific contractual arrangements. A general promise to work out a solution together later offers little certainty once costs are mounting.

4. Avoid commitments before an informed decision

The Dutch Franchise Act has been in force since 1 January 2021 and is incorporated into Book 7 of the Dutch Civil Code. Among other things, it requires franchisors to provide relevant information before the agreement is concluded. This includes location-specific investments and financial obligations insofar as they fall within the statutory disclosure requirements.

Once the required information has been received, a statutory standstill period of at least four weeks applies. During this period, as the franchisor, you must not, among other things, encourage payments or investments connected with entering into the franchise agreement. Do not pressure a prospective franchisee into making an unconditional commitment to premises in advance.

Explore with a lawyer whether a reservation or an agreement subject to appropriate conditions is possible. These might cover financing, consent for the intended use, necessary permits and the valid conclusion of the franchise agreement. Such conditions must be specific: who can invoke them, by what date and with what evidence?

Practical takeaway: have the lease and franchise agreement reviewed together as a connected package, but treat them as separate legal obligations. Only make a final commitment once it is clear who bears the risks associated with the premises, which time limits apply and what happens if one agreement ends before the other.