Concurrence of lease agreement and franchise agreement

A franchise agreement is often linked to an agreement for the lease of business premises. What happens if the franchisor and franchisee have a conflict? Does the lease agreement remain in force if there are problems with the franchise?

In practice, franchisees often sign two contracts: a franchise agreement and a lease agreement for business premises. These contracts are closely linked, but from a legal perspective they are independent of each other. The question then is how this combination should be assessed. Are there two separate agreements or a mixed agreement? If the latter is the case, what does that mean for the rights and obligations of both parties? A recent ruling by the District Court of Overijssel provides clarity on this issue.

Mixed agreement

A mixed agreement arises when different types of contracts are so intertwined that they cannot be viewed separately. This is often the case in franchise practice, because the operation of the formula is often inextricably linked to the use of the commercial space. After all, the franchisee cannot operate without a location, while the franchisor is often also the landlord.

In principle, the court will assess the lease agreement and the franchise agreement separately, unless the intertwining is so great that an integrated assessment is necessary. As a result, obligations under one agreement cannot simply be suspended because of problems in the other agreement. The classification as a mixed agreement does not therefore automatically lead to a complete revision of both agreements, but requires a careful analysis of the coherence and intention of the various parties.

In practice, this can be complicated. The use of retail or catering space may be part of a broader agreement, such as a franchise or an operating agreement. It then depends on the circumstances which part is decisive. A single lease agreement may also cover multiple spaces with different uses, such as a warehouse with a shop or a gym with a bar. In that case, the dominant use determines whether the space is classified as 230a space or 290 commercial space.

The case before the Overijssel District Court

In the case before the Overijssel District Court, a franchisee had accumulated considerable rent arrears with the franchisor and had also failed to pay other invoices. The franchisor had therefore excluded the franchisee from the franchise system and requested the court to order the tenant to vacate the premises at short notice, because he wanted to operate the store himself. The tenant argued that he was entitled to suspend payments because the franchisor had provided inaccurate forecasts, as a result of which he was unable to operate a profitable business.

However, the preliminary relief judge rejected this defense for the rent arrears. Although the agreements were linked in practice, the lease agreement remained legally independent. As a result, a suspension of rent payments due to possible shortcomings in the performance of the franchise agreement was not permitted. Incidentally, even if the agreements had been linked, the tenant would not have been allowed to suspend the rent, as he was still able to use the rented property. Because the tenant did not pay his rent, the eviction of the property was granted within 48 hours. However, the tenant did not have to vacate the property, as the landlord had seized the inventory.

The preliminary relief judge did not rule on the other invoices. It was too unclear what exactly had been agreed upon regarding the franchise, and therefore further investigation, such as witness hearings, would be necessary, which is not possible in preliminary relief proceedings.

Legal significance

The ruling shows that classification as a mixed agreement does not mean that all obligations automatically intertwine. The lease agreement retains its independence, even when it is part of a broader franchise structure. Only in exceptional cases, where there is close interdependence or obvious deception, can suspension be justified. However, this requires a more extensive investigation that cannot take place in summary proceedings.

Practical implications

For franchisees, this means that they cannot lightly suspend their rental obligations due to alleged shortcomings in the franchise agreement. The risk of eviction is considerable and could bring operations to a complete standstill. For franchisors, the ruling confirms that they can enforce the lease agreement independently, even if there is a dispute about forecasts and agreements in the franchise relationship. At the same time, the case underscores the importance of transparency and realistic forecasts in order to prevent future disputes.

When entering into a franchise arrangement that includes the lease of a store, the parties must therefore be aware that they are dealing with two different legal relationships. The agreements are practically intertwined, but legally they are separate. Only careful coordination of the contracts can prevent this tension from leading to costly legal proceedings. Entrepreneurs would therefore be wise to have both agreements reviewed by a lawyer in advance and to make explicit agreements about the relationship between them, so that they are not faced with surprises if the business performance is disappointing.

Checklist for franchise and lease practice

For franchisees:

• Continue to meet your lease obligations, even in the event of disputes about the franchise agreement.
• Carefully document any discrepancies between the forecasts and the actual turnover.

For franchisors:

• Provide transparent and realistic forecasts to the franchisee.
• When enforcing the agreement, take into account the independence of the lease agreement.
• Prevent disputes through clear contractual coordination and documentation.

Real estate and lease attorney

Do you have questions about the concurrence of franchise and lease agreements, or would you like to know whether your contracts offer sufficient protection? Russell Advocaten is happy to assist you with expert advice and guidance. Please contact us: