In his latest column for Business Advice, franchising law expert Andrew Pena hones in on UK franchising regulation to find out why it offers companies a great environment to pilot franchising businesses.
The UK is increasingly becoming one of the most attractive countries for franchisors to begin international expansion. There are a number of reasons for this. The UK is seen as commercially attractive as there are few barriers to entry, as well as highly credible as an international business centre benefiting from a fair and reliable legal system. This latest article focuses on how UK regulation offers a great environment to pilot franchising businesses.
UK franchising regulation
There are no laws specifically regulating franchise agreements in the UK. Parties are generally free to agree all the terms of contracts, save to the extent that laws affecting commercial contracts may apply.
By contrast, many jurisdictions outside the UK specifically regulate franchise relationships. Such regulations can involve additional obligations or restrictions imposed upon franchisors that are not included (or required to be included) in a franchise agreement. These restrictions might include:
• Mandatory cooling-off periods
• Obligations to disclose to franchisees specific information and documents prior to entering into a franchise agreement
• Requirements to register relevant trade marks
• Prohibiting a franchisor from requiring a franchisee to undertake significant capital expenditure during the term of the franchise agreement
• An obligation that the franchisor act in good faith towards its franchisees
• An obligation on the franchisor to notify its franchisee prior to the end of the term as to whether the franchisor agrees to renew the franchise agreement
• An obligation on a franchisor to register and obtain approval of its franchise opportunity marketing materials and details of the individuals who will market the franchising opportunity
• An obligation on the franchisor to allow the sale of a franchise business
• Limitations on the franchisor’s ability to require the purchase of goods and services from nominated suppliers
• Prohibitions on discriminating between franchisees
• Prohibitions on preventing the free associations between franchisees
The areas of law that typically affect franchise agreements are those concerning misrepresentation, competition and restraint on trade. The differences in law between England, Wales, Scotland and Ireland are not substantial, but do require some consideration to accommodate local jurisdictions.
Many of the regulations cited above are aimed towards preventing franchisees from entering into a franchise agreement based on false or misleading information provided by a franchisor.
While the UK does not impose disclosure obligations on franchisors prior to entering into a franchise agreement, franchisees do have remedies against a franchisor in circumstances where franchisees are induced into entering the franchise agreement as a result of a misrepresentation – like a false representation of fact – made by the franchisor.
As such, while there is no specific regulation governing pre-contractual disclosure to prospective franchisees, it is prudent for a franchisor to consider what information will be provided to a franchisee about the franchise opportunity to reduce the likelihood of future claims for misrepresentation.
The Competition Act 1998 regulates contracts, including franchise agreements. The main area of the Competition Act that may affect franchisors is the prohibition from entering into agreements that have as their object or effect the restriction, distortion or prevention of competition in the UK. The European Commission has issued a block exemption notice that has the effect of exempting franchisors from the application of certain competition rules, providing certain conditions are met.
Professional advice on a franchise agreement and overall arrangements should be taken. Businesses should understand the turnover of the parties to the agreements, the market share of those parties, and the nature of the anti-competitive clauses to determine whether the arrangement will fall within or outside the exemption block.
Common law rule against restraint of trade
Franchise agreements will typically impose restrictions on franchisees from operating a similar business for a period of time and within a particular area both during and after termination of franchise agreements. With common law, such a contractual provision is unenforceable unless the party seeking to rely upon it demonstrates that the provision goes no further than necessary to protect the legitimate interest of a franchisor. If carefully drafted so as to go no further than is necessary to protect a franchisor’s legitimate interests, such post-termination restrictions are generally enforceable in the UK.
Differences in law between England, Wales, Scotland and Northern Ireland
The substantive differences in law in the different countries of the UK are relatively minor and will not require wholesale redrafting of franchise agreements in each country. However, there are some differences in the laws that need to be accommodated for in a franchise agreement.
Typical areas of difference will include references in a franchise agreement to UK acts of parliament that do not extend to all UK countries. Clauses in franchise agreements that give a franchisor rights in respect of land, clauses that refer to procedural matters (such as the right of a franchisor to obtain an injunction) will need to be tailored to the jurisdiction concerned. Such amendments may be made by way of an appropriate addendum agreement rather than a redrafting of an original agreement.
In conclusion, the UK is an attractive jurisdiction for franchisors. Franchising is not an area that is specifically regulated, and is therefore increasingly the first port of call for companies to pilot franchised businesses or to begin international growth. However, franchisors do need to give some consideration to the laws that typically affect franchise agreements, including local laws specific to the different countries of the UK.
Now that you’re up to speed with UK franchising regulation, why not take a look at how you can tackle late payments? Our expert David Banfield gives his advice on useful issues to address so that your business doesn’t end up in a hole.
Sign up to our newsletter to get the latest from Business Advice.