Facts

Franchise agreements Most Swedish franchise agreements contain a clause that explicitly states that the franchisee has no right to compensation from the franchisor when the franchise agreement expires and the expiration is not due to a breach of contract on behalf of the franchisor. Such a clause is valid under Swedish law.

If the franchise relationship in question can be construed as actually being a relationship between a principal and a commercial agent instead of a franchisor-franchisee relationship, the Commercial Agents Act – with its mandatory rules governing the right to severance compensation – will prevail.

Lease agreements Where the franchised business is conducted from a location such as a restaurant or shop, there will also be a lease agreement between the franchisor as the landlord and the franchisee as the tenant. Usually the franchisor has entered into a lease agreement with the building owner of and subsequently sub-leases the location to its franchisee.

Under mandatory Swedish law, a tenant has the right to compensation when the lease agreement expires. There are certain exemptions to that rule, for example, if the building is to be demolished or substantially refurbished or the landlord can show the court reasonable cause for the termination of the lease agreement that could override the tenant's right to compensation due to the termination in question.

The law allows that before the tenant moves into the location, the landlord and tenant should agree in writing in a separate document – not as a provision in the lease agreement – that the tenant waives its rights to said compensation. Such a written waiver must be approved by the court in order to be valid.

Different agreements

Franchise and lease agreements are different, but are usually bound together in an agreement bundle and signed simultaneously by the franchisor/landlord and the franchisee/tenant. These two agreements usually each contain a provision explicitly stating that they are dependent on each other; thus, when the franchise agreement expires, so too does the lease agreement and vice versa.

However, two sets of rules collide – the non-right of the franchisee to compensation according to the franchise agreement and the right of the tenant to compensation under tenant law. This conflict was dealt with by the Supreme Court in 2012.

Decision

A franchisor had terminated a franchise agreement and with it the connected lease agreement. The reason for the termination was that the franchisor planned to operate the franchised business as its own business. It was an oil company that planned to operate gas stations within its own business organisation. One of the franchisees submitted a claim to the court for compensation as a terminated tenant.

The issue was whether the rules under tenant law regulating tenant compensation applied within the framework of a franchise relationship and thus within a complex set of agreements where the leasing of a location was only part of a major contract also governing distribution and licensing, among other things. The dispute ended at the Supreme Court with a ruling that has been widely discussed within the Swedish franchise community and stated that the rules on compensation for a tenant also apply within a franchise relationship. In this particular case, the court ruled in favour of the franchisor/landlord's argument that there was reasonable cause for the termination based on the fact that the location was to be part of the oil company's own business organisation.

Comment

In order to avoid a lengthy court dispute in which the franchisor must prove reasonable cause to avoid an obligation under tenant law to pay compensation to a terminated franchisee/tenant, the franchisor should ensure that – before the franchisee moves into the location of the franchised business – the franchisee signs a separate document containing a waiver regarding the tenant's right to compensation, and then hand over the document to the court for approval. The court procedure will take only a few days and requires no court hearing.

For further information please contact Dan-Michael Sagell at Sagell and Co by telephone (+46 8 611 55 42) or email (dms@saglaw.se). The Sagell and Co website can be accessed at www.saglaw.se.

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