Business climate and recent developments
What is the extent of franchise business in your jurisdiction, including any particular franchise-heavy sectors and notable recent developments?
Franchising is a long-established and respected form of business which has stood the test of time and allowed businesses to adapt to new technologies and changes in the economic milieu.
The franchising model first took hold in the United Kingdom during the 18th century in the tied pub system, in which brewers offered financial support to publicans in exchange for exclusivity over the beer served.
A 2012 British Franchise Association (BFA) study found that there are close to 1,000 brands using the franchising model in the United Kingdom, making a cumulative contribution to the economy of £13.4 billion. Though the franchising model may typically be associated with retail and food and beverage industries, the franchising industry in the United Kingdom spans a variety of business sectors.
Are there any franchising-specific laws in your jurisdiction? What other legal regimes apply?
There are no franchise-specific laws in the United Kingdom. However, franchisors that are members of the BFA must ensure that their agreements are compliant with the BFA Code of Ethics.
Franchising arrangements are therefore governed primarily by the law of contract. Franchisors should also consider the effect of other general laws affecting commercial relationships, such as employment law, competition law, data protection law and the relevant regulations concerning money laundering, anti-corruption, and modern slavery and human trafficking.
Is there a legal definition of ‘franchise’?
There is no generally applicable legal definition of ‘franchising’ in the United Kingdom.
The BFA has adopted the definition used by the European Franchise Federation:
"a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and Individual Franchisees, whereby the Franchisor grants its Individual Franchisees the right, and imposes the obligation, to conduct a business in accordance with the Franchisor's concept."
Are there any specific regulatory implications for foreign franchisors seeking to expand into your jurisdiction?
No. The United Kingdom is open for business and does not discriminate against foreign businesses. Foreign investment and ownership are subject to a comparatively light-touch regulatory regime, and the United Kingdom has relatively benign immigration laws. As a result, the United Kingdom often appeals to franchisors as a base from which to conduct international franchising businesses.
Are any regulatory reforms envisaged or underway that affect franchises?
No. Although Brexit is looming and the overall effect remains uncertain, it seems unlikely that there will be any legal change as a result of Brexit that will affect franchising in any particular or significant manner.
Which models and company forms are commonly used for franchises in your jurisdiction? Are there any restrictions or requirements as to which models and forms may be used?
In England and Wales, there are no real restrictions on the company forms that a franchisor may take; however, franchisors invariably trade through limited liability companies.
Due to the small size of the United Kingdom, regional franchises are uncommon – a franchisor will typically grant individual franchises to franchisees. For foreign franchisors, the most typical method of entering the United Kingdom is to grant a master franchise or development agreement covering the whole of the United Kingdom.
Are there any national or regional franchising associations? If so, is membership mandatory and what operational codes and guidelines apply?
The BFA was established in 1977 and is a leading member of the European Franchise Federation. Membership is not mandatory. The BFA's stated aim is "to promote ethical franchising practice in the UK and help the industry develop credibility, influence and favourable circumstance for economic growth". Its members are obliged to comply with a code of ethics, which is based on the European Franchise Federation’s own code.
Common features and contractual requirements
What are the common elements of franchise agreements in your jurisdiction? Do any requirements or restrictions on contractual provisions apply?
There are no legal restrictions on the form of franchise agreements in the United Kingdom. In terms of requirements or restrictions on specific contractual provisions, post-termination restrictions may be subject to competition law.
Key clauses in franchise agreements include:
- the grant of rights;
- a licence of the franchisor's intellectual property;
- the obligations on each party during the relationship;
- the financial terms of the franchise arrangement;
- rights of termination;
- post-termination restrictions; and
- non-compete clauses.
There is no statutory requirement for a franchise agreement to be in English. However, under the British Franchise Association (BFA) Code of Ethics, it must be translated into the official language of the country of the franchisee.
Are parties to a franchise agreement subject to an implied or explicit duty of good faith?
There is no explicit duty of good faith imposed on parties to a franchise agreement. Historically, good-faith clauses in English law contracts have not been deemed binding. However, recent case law (in particular Yam Seng Limited v Initial Trade Corporation Limited  EWHC 111) indicates that ) a duty of good faith may be imposed in relational agreements (ie, agreements which create an ongoing relationship between the parties to be based on mutual cooperation, trust and communication – such as franchise agreements).
Are franchise agreements subject to any formal or documentary requirements, including registration?
No – there are no registration requirements in the United Kingdom.
What due diligence should both parties undertake before entering into a franchising agreement?
There are no legal requirements for due diligence in the United Kingdom; it is merely a matter of good commercial practice to undertake such due diligence. The principle of caveat emptor (buyer beware) applies.
Are franchisors subject to pre-contractual disclosure requirements? If so, do any exemptions apply? What remedies are available to franchisees in the event of breach of these requirements?
No. Franchisors are under no statutory obligation to make pre-contractual disclosures in the United Kingdom.
However, the BFA Code of Ethics requires its members to disclose certain information in advance of entering into franchise agreements, including:
- the business and financial position of the franchisor;
- the franchise network and other franchisees;
- any financial data or projections; and
- the key terms of the franchise agreement.
If a franchisor decides to volunteer pre-contractual disclosures of its own accord, it should ensure that any information provided is accurate and not misleading, so as to avoid falling foul of the laws of misrepresentation.
Franchisees to whom a misrepresentation has been made which induced them to enter into the franchise agreement (whether negligently or fraudulently) may have a remedy under the Misrepresentation Act 1967 or common law. If a franchisee makes a successful claim for misrepresentation against the franchisor, it may seek compensation for the losses suffered and may be able to rescind the franchise agreement.
Franchisors often seek to limit their liability for misrepresentation by including in the franchise agreement a warranty by the franchisee to the effect that it has not relied on any representation made by the franchisor other than as set out in the franchise agreement itself. The courts have, in some instances, refused to uphold such provisions in order to protect franchisees.
Choice of law
May the parties freely choose the governing law of the franchise agreement?
Yes. Both the Rome Convention (on the law applicable to contractual obligations (OJ 1998 C27/34)) and the Rome I Regulation (593/2008) emphasise the autonomy of parties to choose the governing law of their contracts and provide that such choice must be upheld (other than in a few limited scenarios).
What fees are typically charged under a franchise agreement?
There are no legal requirements in the United Kingdom regarding the nature, amount or terms of payment of fees.
Typically, a franchisor will charge an upfront fee for the initial grant of rights, and thereafter an ongoing fee, which is generally (though not always) based on a percentage of the franchisee's turnover.
If the franchisor is to conduct regional or national advertising on behalf of its franchisees, the franchise agreement may require each franchisee to make a contributory payment to the costs of such advertising campaigns.
Other fees levied by a franchisee will be fact-specific and are a matter for the parties to agree.
Do franchisees have a right of renewal?
Renewal is a matter to be decided between the parties to the franchise agreement. There are no legal restrictions or obligations on renewal.
On what grounds may a franchisor refuse to renew?
There is no obligation to renew, and so a franchisor does not have to state any grounds to refuse renewal either as a matter of law or under the BFA code.
The renewal right will be governed by the relevant clauses of the franchise agreement, and at a minimum such clauses usually prevent renewal if the franchisee has been in substantial breach of the franchise agreement.
The parties are free to determine further conditions on which renewal may be granted or refused in the franchise agreement.
How are renewals of franchise agreements usually effected? Do any formal or substantive requirements apply?
This is an entirely contractual matter for the parties to decide. Typically, a franchise agreement may provide for automatic renewal (provided that there is no breach of the agreement by the franchisee) or require the franchisee to give the franchisor notice of its desire or intention to renew the agreement.
On what grounds may a franchisor terminate a franchise agreement? Are any remedies available to franchisees in this regard?
There are no specific legal requirements regarding termination. The grounds for termination are a matter to be decided between the parties to the franchise agreement.
The franchisor will usually require the rights to terminate in the event of:
- the franchisee’s insolvency;
- material breach of the franchise agreement;
- non-payment of fees;
- failure to follow the franchise format; and
- the franchisee ceasing to operate the franchise business.
Ongoing franchisor/franchisee relationship
What mechanisms (formal and informal) are commonly used by franchisors to ensure franchisee compliance with the operational terms and standards of the agreement?
The franchise agreement will impose a number of obligations on the franchisee regarding compliance with the franchisor's standards. These will be supported by rights for the franchisor to conduct periodic inspections and audits of the franchisee. The franchisor will insist on a right to terminate in the event that the franchisee does not operate the franchise business in compliance with the business format and the standards of the franchisor.
Amendment of operational terms
Can the franchisor unilaterally change operational terms and standards during the course of the agreement?
Not unless the franchisee expressly agrees to such changes, in which case they are not really unilateral.
Do any specific laws affect the ongoing franchisor/franchisee relationship after they enter into the franchise agreement?
There are no franchise-specific laws in the United Kingdom. However, the following may be of general application:
- the law of contract;
- employment law;
- data protection law; and
- relevant regulations concerning money laundering, anti-corruption, and modern slavery and human trafficking.
Do any ongoing disclosure requirements apply during the course of the agreement?
Transfer and sale
Transfer and sale
What rules and procedures apply to the transfer and sale of a franchise business?
There are no legal requirements or restrictions relating to the transfer and sale of a franchise business. This is a matter of contract and franchisors typically either restrict the right for the franchise to sell or transfer entirely, or require the right to approve the transferee or purchaser in advance. They may also wish to reserve a right of first refusal to enable them to buy back the franchise business. The franchisor may also elect to impose criteria relating to the suitability and character of the transferee or purchaser.
As regards procedure, this will depend on whether the sale is a sale of the entire business or merely a transfer of the franchise agreement.
What competition laws apply to franchises, with particular regard to:
(a) Non-competes and other restrictive covenants?
Restrictive covenants in franchise agreements may affect trade between member states of the European Union and thus fall foul of Article 101 of the Treaty on the Functioning of the European Union (TFEU). However, as vertical agreements (ie, agreements between entities at different levels in the supply chain), franchise agreements may be exempt from the provisions of Article 101 under the EU Vertical Block Exemption Regulation.
Indefinite in-term non-compete obligations, or in-term non-compete obligations which last longer than five years, are not permitted and will be void for the purposes of the regulation (though the remainder of the agreement may still rely on the regulation). Post-term non-compete obligations are prohibited unless the franchisor's ‘secret’ know-how is dependent on them, in which case they are permitted, but for no longer than one year.
(b) Exclusive geographical areas?
Franchisors may allocate exclusive territories to franchisees and prohibit franchisees from making active sales outside their territory (ie, by proactively seeking customers outside the territory). Franchisors may not prohibit passive sales to customers outside their territory (ie, responding to enquiries from such customers). Such a restriction will render the entire franchise agreement void for the purposes of the regulation.
(c) Price fixing and mandatory product purchases?
Price fixing and resale price maintenance obligations are not permitted and will render the entire franchise agreement void for the purposes of the regulation, as resale price maintenance is a hardcore restriction. However, franchisors are permitted to set maximum prices or indicate recommended prices to franchisees, provided that they are not compulsory.
(d) Online trading?
The rules regarding active and passive sales apply equally to online trading. Franchisors may restrict active online sales outside the territory, but may not restrict passive online sales outside the territory. A franchisor may not prohibit a franchisee from operating its own website, but imposing quality standards on any such website is permitted.
How can franchisors protect their intellectual property (eg, trade marks and copyright)?
Franchisors should consider, as a priority, protecting their trademarks, domain names, copyright (eg, in respect of their operations manual, marketing materials and website text) and any databases that they own.
Since copyright subsists automatically once the work is created, franchisors will not need to register their copyright in the United Kingdom. Trademarks are protected in the United Kingdom by applying for a UK trade mark at the UK Intellectual Property Office, and in Europe by applying for an EU trade mark at the EU Intellectual Property Office. Franchisors should consider registering brand names and any logos used by the business as trademarks. The franchisor will need to determine which goods and services any trade mark protection will be required to cover. Any registrations should be sufficiently broad to cover all goods and services currently offered by the franchise business to ensure that no other entity can use identical or similar trade marks in relation to identical or similar goods or services, as this could lead to consumer confusion.
Databases may be protected as a form of copyright (which requires no registration) or by way of a separate database right (which is an automatic right).
Domain names are not registered centrally, so they must be registered through a registrar. A domain name is registered for a set period and will need to be renewed.
Thereafter, IP rights can be protected by a combination of contractual obligations on the franchisee, and by legal proceedings in respect of infringements.
Must IP licences be registered?
No, there is no legal requirement to register IP licences in the United Kingdom.
How can franchisors protect their know-how and trade secrets?
Know-how and trade secrets may be recorded in the franchisor's operations manual, the text of which would attract copyright protection (though this would protect only the form of expression of the know-how and not the underlying ideas).
Franchisors typically protect their know-how through contractual confidentiality and non-use obligations imposed on the franchisee in the franchise agreement.
What are the consequences of a franchisee’s breach of the franchisor’s IP, know-how or trade secret rights and what remedies are available to the franchisor in this regard?
Breach of contractual provisions regarding use of intellectual property will give the franchisor the right to terminate the franchise agreement. Infringement of intellectual property by the franchisee would also entitle the franchisor to seek redress through the courts – for example, by seeking an injunction to restrain the infringing use or by claiming damages in respect of it. If the IP breach involves products such as infringing branded goods, the franchisor may also be entitled to delivery up and destruction of any such goods or an account of profit for its sale. The franchisor could also request an undertaking from the franchisee not to infringe its intellectual property in future. Under common law, a claim can also be brought for the tort of passing off, when one party takes advantage of the reputation of another. This can be by using a similar name to the party with a good reputation or implying a link with its goods or services. A successful claimant needs to demonstrate:
- strong goodwill in its brand;
- that there has been a misrepresentation; and
- that damage (eg, loss of business) has been suffered as a result of that misrepresentation.
This can be difficult to establish when contrasted with establishing a claim for trademark infringement.
Laws and considerations
What real estate laws and considerations should franchisors bear in mind where:
(a) The franchisor owns the premises on which the franchisee operates?
The franchisor will usually need to grant a lease to the franchisee. The parties should ensure the term of the lease and any renewal rights and termination rights thereunder correspond to those of the franchise agreement.
(b) The franchisor sub-leases the premises to the franchisee?
The franchisor should ensure that the term of the sub-lease is shorter than the term of the franchisor's own lease (usually by at least three days) so that it can yield up the property with vacant occupation at the end of the head lease. The franchisor may be unable grant a renewal lease to the franchisee without further negotiations with the landlord. The franchisor should also ensure that the franchisee is required under the sub-lease to comply with the franchisor's tenant obligations under the head lease.
Landlord consent to the sub-letting is likely to be required and the landlord will likely consider the covenant strength of the franchisee (as it could end up with a direct relationship with the franchisee) and may require security such as a guarantor for the franchisee.
(c) The franchisee leases the premises from a third-party landlord?
The franchisor may be required to act as guarantor of the franchisee's obligations under the lease, particularly if the franchisee is a new or special purpose company.
The franchisor has no interest in the property and so the franchise agreement should include any obligations that the franchisor requires of the franchisee relating to its management and use of the property. The franchisor may wish to include agreements with the franchisee to take a transfer of the lease if the franchise agreement terminates, to allow the franchisor to continue to operate from the property in such circumstances. This would be subject to landlord agreement. If the landlord terminates the franchisee's lease, the franchisor could operate from the property only if it enters into a new agreement with the landlord.
(d) The franchisee owns the premises?
The franchisor has no interest in the property and will be unable to operate the business from the property if the franchise arrangement terminates.
Can franchisees or their employees be regarded as employees of the franchisor for liability purposes? If so, how can franchisors mitigate this risk?
Statute does not recognise franchisors and franchisees as being financially independent. Franchise agreements will usually contain express provisions that the parties are legally and commercially independent. This will be reflected by the fact that the parties are separate companies under different ownership and that (beyond the franchisor-franchisee relationship) the franchisor exercises no control over the franchisee. In a genuine franchisor-franchisee relationship, franchisees are not and cannot be treated by the courts as employees.
Tax and currency controls
What tax regimes apply to the franchisor/franchisee relationship?
There are no specific franchising tax regimes in the United Kingdom.
Franchisors and franchisees which are UK tax resident or carrying on a trade through a permanent establishment in the United Kingdom will be liable to pay corporation tax on profits.
Shareholders of franchisor or franchisee companies which are UK tax resident will be liable to pay tax on dividends received (ie, corporation tax if corporate shareholders and income tax if individual shareholders).
Where payments are made to or from non-UK tax resident entities under a franchise agreement, withheld tax may be payable.
Do any currency controls apply with respect to foreign franchisors?
What issues are typically the subject of disputes arising in the franchisor/franchisee relationship?
Franchisees typically allege misrepresentations by the franchisor and lack of support from the franchisor. Franchisors typically allege non-compliance with the system, competition with the franchise and non-payment of fees by the franchisee.
Which venues are empowered to hear franchising disputes in your jurisdiction? What considerations should be borne in mind when choosing a venue?
The High Court and arbitral organisations are empowered to hear franchising disputes. For most breach of contract claims, litigation is the typical form of dispute resolution in the United Kingdom, as opposed to arbitration. Litigation is usually public whereas arbitration is confidential; this can be an important factor in deciding a venue for resolving any disputes. There is also a high level of disclosure in the litigation process in the United Kingdom; whether that is a help or hindrance to a case is something to be considered. There is also a well-structured appeals process in UK litigation which is not mirrored in arbitration (which does not generally have an appeals process).
Alternative dispute resolution
Is alternative dispute resolution (ADR) commonly used for franchising disputes in your jurisdiction? What considerations should be borne in mind when opting for ADR?
The British Franchise Association also offers a mediation and arbitration service. The mediation service is sometimes used, but the arbitration service rarely so. Some parties may favour mediation as it is non-binding and, as such, no decision will be imposed on the parties until a binding agreement is reached. Mediation can also be a relatively inexpensive way of resolving a dispute when contrasted with litigation and arbitration.
Foreign judgments and awards
What regulations and procedures apply to the recognition of foreign judgments and arbitral awards where international franchising networks are concerned?
The United Kingdom is a member of the New York Convention on the enforcement of arbitral awards and the Brussels Convention provides for the enforcement of court rulings in other European countries. There are a number of other country-specific arrangements also in force.