Franchising in Spain: overview

A Q&A guide to franchising in Spain.

The Q&A provides an overview of the main practical issues concerning local and international franchising, including: current market activity; franchising regulatory framework; contractual issues relating to franchising agreements (analysing pre-contract disclosure requirements, formalities, parties' rights and obligations, fees and payments, term of agreement and renewal, termination and choice of law and jurisdiction); Operations Manual; liability issues; intellectual property; real estate; competition law; employment issues; dispute resolution; exchange control and withholding; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Franchising: Country Q&A tool.

This Q&A is part of the global guide to franchising law. For a full list of jurisdictional Q&As visit www.practicallaw.com/franchising-guide.

Alberto Echarri, Echarri & Brindle
Contents

Market

1. What have been the main developments in the franchising market over the past 12 months?

The franchise sector consolidated its growth trend in 2015, after a crisis that started in 2007. The number of brands grew by 8%, to 1,114 franchise brands. The number of franchise units grew by 2%, to 56,700 units. Investment grew by 2.5%, totalling EUR6,854 million. The number of franchisees grew by 2% to a total of 56,698. Employment created by the sector grew by 1.8%, totalling 342,000 employments, which is an average of six employees per unit. The global turnover of the franchise sector in 2015 grew by 2% to EUR18.7 billion.

The main players operate in the largest sectors of:

  • Food, with a turnover of EUR2,151 million.

  • Restaurant and fast food, with a turnover of EUR1,730 million.

  • Retail, with a turnover of EUR1,192 million.

  • Services, with a turnover of EUR1,233 million.

In 2015 the sector saw a growth of 83% to 89% in new Spanish franchises, and a growth of 11% to 17% in international brands, totalling 138 new franchisors. The largest market growths were in Madrid, and the regions of Cataluña, Valencia and Andalucia. Most new franchises in 2015 were established in the following sectors:

  • Online business.

  • Self-service (mainly laundry services).

  • Education.

  • Restaurant and fast food.

  • Specialised food products.

  • Personal care.

  • Generally, low cost models.

 
2. What are the most commonly used methods of local and international franchising?

Local franchising

Direct franchising through single unit franchise agreements is the most commonly used and best known method of local franchising. Master franchise agreements, as well as regional development agreements, are customarily used in the development of broad territories or defined geographic areas where the franchisor does not wish to get financially involved or lacks the financial strength or market intelligence to do so.

International franchising

Spanish franchisors use master franchise agreements and master and regional development agreements when franchising internationally. These are the most commonly used structures and are recommended as a tested development instrument that provides franchisors with the necessary contractual elements, controls and assurances to structure an international network without assuming the full financial risk involved in direct franchising.

 
3. Are there any specific reasons for an overseas franchisor to use a separate entity for entering into a franchise agreement with a franchisee in your jurisdiction?

Foreign franchisors commonly use local subsidiaries, as opposed to branches, to limit their liabilities, for operational reasons and, eventually to optimise their taxation when they plan to develop company owned franchises in the local market.

 

Regulation of franchising

4. What is the legal definition of franchising and/or a franchise?

Section 62.1 of the Retail Regulation Act (Ley 7/1996, de Ordenación del Comercio Minorista, 15 January 1996) provided the first legal definition of a franchise in Spain: "a franchise is a commercial activity carried out by virtue of an agreement or contract whereby an enterprise, called the franchisor, grants to another, called the franchisee, the rights to exploit its proprietary system for the commercialisation of products or services".

This rudimentary definition was further elaborated in section 2 of Royal Decree 201/2010, which provides that: "a franchise is a commercial activity performed by virtue of the contract whereby a company, the franchisor, assigns to another, the franchisee, in a specific business sector, in exchange for a direct, indirect or direct and indirect financial consideration, the right to exploit a franchise over a business or activity that the franchisor has been developing previously with sufficient experience and success for the marketing of certain types of products or services".

According to Royal Decree 201/2010, a franchise must, at a minimum, include:

  • The use of a common name, establishment sign, other IPRs, uniform layout of premises, or means of transport, in accordance with the object of the contract.

  • Communication of technical knowledge and know-how by the franchisor to the franchisee.

  • The ongoing provision of commercial or technical assistance by the franchisor to the franchisee throughout the duration of the contract.

 
5. What are the laws regulating franchising?

Spain does not have a specific franchise law that regulates the relationship between franchisor and franchisee. Instead, Spanish franchise law is a set of several laws and regulations that apply to the various different aspects of franchising. However, there are no laws that specifically encourage franchising.

Contractual matters

Section 62 of the Retail Regulation Act contains the first specific legal references to franchising enacted in Spain. Paragraphs 1, 2 and 3, respectively, provide for the:

  • Definition of a franchise.

  • Obligation of franchisors to register with the Franchisors Registry.

  • Obligation of the franchisor to provide pre-contractual information to the franchisee.

Section 62 of the Retail Regulation Act was implemented by Royal Decree 201/2010, which:

  • Generally regulates franchising and information reporting to franchisors.

  • Provides the definition of a franchise and describes the essential elements of a contract in order for it to qualify as a franchise agreement.

  • Discriminates between franchising and analogous contractual forms such as concession and exclusive distribution agreements.

  • Provides in detail the pre-contractual information that a prospective franchisee must receive from the franchisor before entering an agreement with or in any way financially committing to the franchisor.

Franchising agreements are subject to the civil and commercial law general principles of contract. In default of specific contractual provisions contained in the franchise agreement, the provisions on obligations and contracts of the Commercial Code and the Civil Code apply. Relevant international treaties may also apply to choices of law and jurisdiction.

Contractual and post-contractual competition restrictions and covenants are regulated by the Competition Act (Ley 15/2007, of 3 July, de Defensa de la Competencia) as implemented by Royal Decree 261, of 22 February 2008, and Regulation (EU) 330/2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices (Vertical Restraints Block Exemption), as interpreted by the EU Guidelines on vertical restraints.

Dealings with local agents to promote franchise sales or to seek franchisees based on a monetary payment or commission are subject to the Agency Act (Ley 12/1992, de 27 de mayo, sobre contrato de agencia), which is a transposition into Spanish law of Directive 86/653/EEC on self-employed commercial agents.

Non-contractual matters

The Retail Regulation Act provides for the creation of franchises and registration with the Franchisors Registry. Royal Decree 201/2010 further regulates the:

  • Creation and functioning of the Franchisors Registry.

  • Registration requirements.

  • Information that must be delivered to the Franchisors Registry, and annually updated by franchisors.

The Retail Regulation Act provides for monetary fines sanctioning failures to comply with the registration and disclosure requirements.

Specific laws and regulations apply to regulated activities carried out by franchises, both at a national level and within the competencies of the relevant regional governments:

  • Retail trade is specifically regulated by the Retail Regulation Act. E-commerce and remote sales are governed by Act 34/2002 and Royal Decree 225/2006 respectively.

  • Opening hours are regulated by Act 1/2004 and local regulations passed by regional governments.

  • Leaseholds are governed by the Urban Lease Act (Ley de Arrendamientos Urbanos).

  • Unfair competition falls within the scope of Act 33/1991.

  • Consumer protection is governed by Royal Decree 1/2007.

Taxable income arising from the franchise agreement itself and the activities of the franchisor and the franchisee are subject to the:

  • Corporation Tax Act and regulations.

  • Value Added Tax Act and regulations.

  • Personal Income Tax Act and regulations.

  • Laws and regulations governing special and regional taxes.

  • The relevant double taxation bilateral treaties.

Social security charges and insurance and employment obligations of the franchisor and the franchisee in relation to their employees are governed by the relevant social security and employment laws and regulations.

 
6. What is the regulatory authority responsible for enforcing franchising laws and requirements in your jurisdiction?

Contractual disputes and contentious competition issues will be enforced by the relevant courts, whereas non-contractual issues will be enforced by the relevant government agencies.

 
7. Must the franchisor be registered with a professional or regulatory body before setting up a franchise system?

Franchisors who intend to franchise in Spain must register with the Franchisors Registry within three months from the commencement of their activity. Franchisors from the EU operating without a permanent establishment in Spain are exempt from the obligation to register, provided that no business premises have been opened by their franchisees. Registration with the Franchisors Registry is compulsory but business can commence beforehand. Failure to comply with the registration requirement is sanctioned with a monetary fine of between EUR6,000 and EUR30,000. Repeated failure can be sanctioned with fines ranging from EUR30,000 to EUR60,000, or even up to EUR900,000 if the yearly turnover of the franchisor exceeds EUR600,000. Penalties are time-barred after two years from the date of the default or the ceasing of the continued default (Retail Regulation Act and Royal Decree 201/2010).

The required information must be filed by submitting an ad hoc official form that must include, among other things, the following data:

  • Identification of the franchisor.

  • Data relating to trade marks.

  • Description of any IPRs licensed through the franchising contract and confirmation of the transfer of ownership or licences to use such rights.

  • Description of the business activity of the franchise, including:

    • a report on the activity;

    • the length of time for which the company has been in the franchising business;

    • the number of franchisees in the network;

    • the number of franchised and company-owned franchises;

    • the franchisees that have ceased to belong to the network in Spain during the last two years.

Master franchisees must provide information about the:

  • Master franchisor.

  • Duration of the master franchising agreement.

  • Assignment agreement entered by the original franchisor, if any.

The following details can voluntarily be reported to the Franchisors Registry, for information purposes only:

  • Quality certificate of goods and services.

  • Adherence to an alternative dispute resolution system between franchisor and franchisee.

  • Existence of ethics codes in the framework of the franchise agreement.

  • Adherence to consumers' arbitration systems and to other alternative dispute resolution systems for consumers' complaints. 

  • Other information deemed to be of general interest.

The pre-contractual information that the franchisor must provide to the franchisee must include evidence of the franchisor's ownership or licence in Spain of the IPRs licensed with the franchise (Royal Decree 201/2010).

 
8. Is there a code of ethics or other means of promoting ethical franchising in your jurisdiction?

Franchisors operating in Spain are encouraged to join the Spanish Franchisors Association (Asociación Española de Franquiciadores) which, as a signatory to the European Code of Ethics, has the mission statement to require franchisors to abide by the Code. However, membership is not compulsory.

International franchisors from member states of the Organisation for Economic Co-operation and Development (OECD) and those adhering to the OECD Declaration on International Investment and Multinational Enterprises (Declaration) must comply with the 2011 OCDE Guidelines for Multinational Enterprises (Guidelines). As enterprises established in more than one country, the activities of international franchisors and their supply chain member entities operating in or from the countries adhering to the OECD or the Declaration are covered by the Guidelines (OECD Commentary 17 to Section II of the Guidelines).

 
9. Do franchisees benefit from any laws designed to protect consumers or small businesses?

Franchisees are not considered consumers and a franchising agreement is not considered an adhesion contract. A franchisee cannot therefore benefit from consumer protection rules within the framework of the franchise agreement. There are certain incentives for the creation of small businesses from which small franchisees may benefit, but there are no specific rules designed to protect small businesses within a franchise relationship.

 
10. Are there any other requirements which must be met before a business can sell a franchise?

There are no further requirements, other than registration with the Franchisors Registry and disclosure requirements (see Questions 7 and 11).

 

Franchise agreement

Pre-contract disclosure requirements

11. Is the franchisor subject to any general or formal pre-contract disclosure requirements?

The Retail Regulation Act and Royal Decree 201/2010 require a franchisor to disclose franchisee-specific true and non-misleading information on the franchise, in writing, at least 20 days before execution of the franchise agreement or pre-agreement, or payment by the prospective franchisee to the franchisor of any consideration. Such pre-agreements include letters of intent or options on a franchise.

The obligation to disclose applies to a prospective franchisee and a prospective master franchisee. Spanish law also requires a master franchisee to provide a prospective franchisee with a disclosure document containing the same information about the master franchisee as must be disclosed for the franchisor, including the franchisor's identity and financial information.

The obligation to disclose applies, regardless of their nationality, to:

  • A renewing franchisee (unless there is automatic renewal).

  • A franchise transferee.

  • An existing franchisee buying an additional franchise.

  • A sophisticated, large or experienced franchisee.

  • A single franchisee or master franchisee.

Royal Decree 201/2010 requires the disclosure document to include all the necessary information for the prospective franchisee to be able to decide freely and knowingly about its incorporation into the franchise network. More specifically, the disclosure document must contain:

  • Essential identification regarding the franchise.

  • A description of the commercial sector subject to the franchise.

  • The exploitation, structure and extension of the franchise network.

  • The essential elements of the franchise agreement.

The franchisor must deliver to the prospective franchisee the following truthful and non-misleading information:

  • Franchisor identification information, including its registration in the Franchisors Registry and Commercial Registry, as well as information on its share capital on the last balance sheet, whether it is totally paid out and in what proportion.

  • Certificate of ownership or licence allowing the use of the trade marks and other IPRs in Spain, including the duration of the licence.

  • Description of the franchise's business sector.

  • Franchisor's experience.

  • Contents and characteristics of the franchise, including:

    • a description of the business and know-how;

    • any continuing commercial or technical assistance; and

    • an estimate of the investment, costs and expenses necessary to start the business.

  • If the franchisor delivers financial projections or an estimate of sales and/or profits, they must be based on supported experience or studies.

  • Structure and extension of the franchisor network in Spain.

  • Essential elements of the franchise contract, including:

    • rights or obligations of the parties;

    • duration of the contract;

    • conditions of renewal and termination;

    • financial or economic clauses;

    • exclusive territory clauses; and

    • limitations on the franchise business.

The franchisor may require that the prospective franchisee maintains confidential all the delivered pre-contract information.

Decree 201/2010 allows franchisors to provide sales forecasts or trading results to prospective franchisees, but requires that they be based on experience or studies and be sufficiently justified. Forecasts, if included in the pre-contract information, are not regarded as an essential element of the franchise agreement, but rather as an ancillary element that does not affect the substance of the agreement. Recent case law (decisions of the Provincial Audience of Barcelona number 633/2004 of 21 September 2004 and the Provincial Audience of Madrid number 618-2007 of 6 November 2008) states that the misrepresentation of sales forecasts cannot by themselves cause the franchise agreement to be considered null and void.

 
12. Must the franchisor disclose fairly and in good faith all facts material to the prospective franchisee's decision to enter into the arrangement, or must the prospective franchisee rely on its own due diligence?

In relation to the civil effects of a default by the franchisor in complying with its pre-contract disclosure obligations, the question is whether non-compliance with section 62.3 of the Retail Regulation Act affects the validity of the franchise agreement. That is, whether the agreement is null and void because of a prior violation of the "public order" rule. On several occasions, Spanish courts (including a decision of the Supreme Court) have declared the nullity of a franchise agreement on the grounds of the franchisor's failure to comply with the pre-contract disclosure obligation or for serious misrepresentations made in the disclosure document. However, in a few cases, other courts have considered that failure to comply with disclosure obligations is an administrative default, as it is a violation of Royal Decree 201/2010 and therefore does not imply the nullity of the franchise agreement. If the misrepresentations made by the franchisor in the disclosure document are minor, Spanish courts generally do not declare the complete nullity of the franchise agreement but, in exchange, acknowledge the franchisee the right to terminate the agreement and claim a compensation for damages.

Formalities

13. What are the formal contractual requirements to create a valid and binding franchise agreement?

Spanish law does not establish any formal requirements to create a valid and binding franchise agreement, other than, implicitly, that the contract be in writing. A franchise agreement need not be notarised or registered in any specific registry, and nor is it subject to any language restrictions. However, customarily, agreements with franchisees are drafted in Spanish, whereas international master franchise agreements are usually drafted in English.

The franchise agreement is categorised as an atypical or non-statute-regulated form of contract as it does not qualify as any of the forms defined and governed by the Commercial Code, Civil Code or other special laws and regulations. The franchise agreement is considered a complex agreement, which has similarities with other forms of contract such as a licence, distribution agreement, or services agreement, but stands as a special category of its own. The courts consistently interpret a franchise agreement as one comprising at a minimum the elements contained in the legal definition provided by section 2 of Royal Decree 201/2010 (see Question 4).

Parties' rights and obligations

14. Is there a general obligation to behave fairly, reasonably or in good faith to the other party during the term of the franchise agreement?

Obligations of the franchisee

Spanish law does not establish the rights and obligations of the parties in a franchise agreement. Therefore, the franchise agreement must clearly define the respective rights and obligations of the franchisor and the franchisee that are specific to the franchise. Any general obligations or operation of contractual law (default, termination, and so on) are governed by default by the Civil Code and the Commercial Code. However, in practice, the more comprehensive the agreement the better.

Rights. The franchisee generally has the right to:

  • Peaceful use of the franchise and its inherent IPRs.

  • Be provided with continued technical assistance and training by the franchisor.

  • Receive know-how from the franchisor.

  • Receive continued marketing and advertising support from the franchisor.

  • Peaceful occupation of its exclusive territory, if granted.

  • No competition by the franchisor, if granted.

  • Terminate the agreement in the event of default by the franchisor.

Obligations. The franchisee is generally obliged to:

  • Pay the franchise fees and royalties.

  • Comply with accounting and reporting standards.

  • Comply with franchise specifications.

  • Respect IPRs and to report local infringements.

  • Respect territorial limitations.

  • Comply with all operations manuals, know-how and training obligations.

  • Comply with all relevant local laws and regulations.

  • Keep confidentiality before, during and after termination of the agreement.

  • Generally, perform in good faith and as a diligent business person.

Obligations of the franchisor

Spanish law does not establish the rights and obligations of the parties in a franchise agreement. Therefore, the franchisor must make sure that all terms and conditions that define and configure the franchise are included in the franchise agreement, especially its rights and obligations, and any limitations to those obligations.

Rights. The franchisor generally has the right to:

  • Collect franchise fees and royalties in a timely fashion and late payment interests.

  • Review the franchisee's accounts and audits.

  • Require strict reporting obligations from the franchisee.

  • Assure and control compliance by the franchisee with its obligations.

  • Limit the franchisee's territory.

  • Require training and compliance with manuals and franchise specifications.

  • Suggest prices and fix maximum prices.

  • Supply products.

  • Establish marketing and advertising plans and funds.

  • Step in, in the event of default.

  • Impose non-competition covenants.

  • Terminate the agreement in the event of default by the franchisee.

Obligations. The franchisor generally has obligations that are reciprocal to the franchisee's rights, mainly, to:

  • Provide pre-contract reliable information.

  • Provide peaceful use of the franchise and inherent IPRs.

  • Provide continued technical assistance and training.

  • Provide continued marketing and advertising support.

  • Respect the franchisee's exclusive territory.

  • Comply with all relevant laws and regulations.

  • Perform in good faith and as a diligent business person.

 
15. Does local law require that particular provisions must be expressly included in a franchise agreement?

There are no mandatory provisions that must expressly be included in a franchise agreement. Implicitly, however, a franchise agreement should, at minimum include the clauses containing the elements that define a franchise (see Question 4).

 
16. Are exclusion and entire agreement clauses enforceable in your jurisdiction? If so, are they effective to protect the franchisor?

Exclusion and entire agreements clauses are commonly used to protect an overseas franchisor that is not party to the local franchise agreement, either in relation to misselling or other defaults by the local sub-franchisor.

 
17. Can the franchisor impose product tying or other purchasing restrictions and non-compete obligations on the franchisee during the term of the agreement?

Restrictions on purchasing and product tying

Tie-in provisions require the franchisee to buy goods or intermediate inputs from the franchisor, thereby "tying" the purchases exclusively to the franchisor. Apart from the economic value that they contribute to the franchisor, tie-in clauses allow the franchisor to verify the source of the inputs used by the franchisees.

Non-compete clauses are subject to the provisions of the Regulation (EU) 330/2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices (Vertical Restraints Block Exemption) if they directly or indirectly require the franchisee to purchase from the franchisor, or from another undertaking designated by the franchisor, more than 80 % of the franchisee's total purchases of the contract goods or services and their substitutes on the relevant market, calculated on the basis of the value or volume of its purchases in the preceding calendar year.

Non-compete obligations and transfer restrictions

Non-compete clauses are generally enforceable within the framework of franchising, but are only exempt if covered by the provisions of the Vertical Restraints Block Exemption. A non-competition obligation can be imposed on the franchisee during the full term of the franchise agreement if the restriction is necessary to maintain the common identity and reputation of the franchise network.

Unless otherwise provided for in the law or in the agreement, franchisor will need consent of the third party to transfer liabilities, but may freely transfer its rights under the agreement to the franchisee. However, in practice most commercial and real estate contracts include non-transferability clauses and change-of-control-clauses where the transfer of the agreement is subject to prior written consent of the third party.

Fees and payments

18. What fees are usually payable by the franchisee? Are there any restrictions on the parties' freedom to set the fees and payments, or any other payment requirements?

Initial fees

Generally, the franchisee pays an initial fee intended to cover the franchisor's expenses related to getting the franchisee up and running. These expenses normally include costs related to securing or approving the location for the franchisee, technical assistance, training and advertising.

Continuing fees (or management charge)

Generally, franchisors see their continuing fees as tied directly to the ongoing support that they provide to the franchisees. Continuing fees typically cover all the support provided by the franchisor, including:

  • Marketing plans.

  • Business strategies

  • Technical assistance.

  • Know-how.

  • Allocated administrative costs and overheads of the franchisor.

  • Estimated costs of the franchisor's actions to further expand and develop the network and the brand.

The most common way of establishing a continuing fee is as a percentage of the franchisee's gross sales (as commonly defined in franchise agreements). Typically, such fees range from 5% to 9%. Some franchisors charge a minimum royalty payment for each given period, whether as a percentage or as a set monetary amount. Other franchisors determine the royalty fee as a set monetary amount based on different sales thresholds.

Advertising charges

Advertising and marketing fees are generally charged as a fixed percentage of the gross sales achieved by the franchisees. These can range from 1% to 7% of gross sales. Advertising fees are used by the franchisor to fund the regional and/or national marketing, advertising and brand awareness initiatives carried out on behalf of the franchise network.

Interest on overdue payments is legally enforceable, and should be carefully provided for in the franchise agreement. Late payment interest can either be fixed in relation to a given reference (such as Libor or Mibor) or as a fixed percentage.

Term of agreement and renewal

19. Are parties free to agree on the term of the franchise agreement? What is the typical term of a franchise agreement in your jurisdiction?

Parties are free to agree on the term of the franchise agreement and Spanish law does not impose a minimum and/or maximum term. Depending on the type of franchise and the investment required by the franchisee or master franchisee, initial terms range between five and ten years.

 
20. What rights of renewal are usually included in the franchise agreement? Are fees paid on renewal?

Commercial practice

Franchisees are usually granted enforceable renewal rights, provided certain contractual conditions are met. These conditions usually include:

  • No contractual defaults by the franchisee.

  • The franchisee not contravening any local laws or regulations.

  • The franchisee agreeing to the terms and conditions of the renewed franchise agreement.

  • The franchisee paying the renewal fee.

Local law

The right of renewal is protected if it is provided in the franchise agreement. As there are no legal provisions on fees payable on renewal, renewal fees must specifically be provided for in the franchise agreement to be binding between the parties.

Termination

21. Are there any limitations on the right of a franchisor to terminate the agreement?

A franchisor can legally terminate the agreement on the following grounds, among others:

  • Default by the franchisee, in accordance with the agreement or statute, if not remedied by the franchisee in accordance with the franchise agreement.

  • Death of a franchisee individual where that individual represents an essential term of the contract.

  • Unauthorised change of control in the franchisee.

  • Termination of the lease/sublease of the franchisor during the term of the agreement.

  • Criminal prosecution or indictment of the franchisee, if provided for in the agreement.

  • Seizure of the franchisee and the assets of the franchisee by a third party or government agency, if provided for in the agreement.

  • Failure by the franchisee to obtain local construction and operating permits.

  • Failure to comply with local regulations covering the franchise.

As the franchisor can only terminate the franchise agreement on legal grounds, the only limitations are likely to be:

  • Those arising from the obligation to act in good faith.

  • Abuses by the franchisee.

  • Compulsory review and confirmation of the termination by the competent court.

Unfounded termination would require the franchisor to reinstate the agreement and to pay for any damages caused to the franchisee, or to pay damages and interests if the agreement cannot be reinstated.

Termination of the agreement by expiration of its term does not require the franchisor to renew the agreement or to compensate the franchisee for not renewing, unless this is otherwise provided for in the franchise agreement. Refusal to renew by the franchisor where there is a contractual obligation to renew will allow the franchisee to seek a remedy from the court (ordinary or arbitration) to enforce the franchisor's obligation to either:

  • Renew according to the terms of the franchise agreement.

  • Compensate the franchisee for damages.

 
22. Are post-term restrictive covenants enforceable?

Spanish courts enforce post-termination restrictive covenants against the franchisee, provided they are balanced, reasonable and proportional to the effect that is pursued by the restriction. Generally, post termination clauses, including confidentiality covenants, are enforceable, and penalties can be established as a deterrent of default. The payment of a fee need not be a condition for their validity.

Post-termination non-competition covenants are legally binding provided they:

  • Do not exceed one year after termination.

  • Are related to the goods/services subject matter of the agreement.

  • Are limited to the premises and land from which the franchisee has operated during the franchise agreement term.

  • Are indispensable to protect the know-how transferred by the franchisor to the franchisee.

 
23. Can the franchisor or a replacement franchisee continue to sell to the former franchisee's customers?

Unless otherwise provided for in the franchise agreement, on termination of the franchise and non-renewal by the existing franchisee, the franchisor, or the replacement franchisee, can continue to sell or provide services to the customers of the franchise. Unless provided for in the franchise agreement, the franchisee is not entitled to any compensation.

Choice of law and jurisdiction

24. Will local courts recognise a choice of foreign law in a franchise agreement for a business operating in your jurisdiction?

Spanish conflicts of law rules recognise a choice of governing law in a franchise agreement. Parties can therefore choose any governing law for a franchise agreement.

 
25. Will local courts recognise a choice of foreign jurisdiction in a franchise agreement for a business operating in your jurisdiction?

Spanish law recognises choice of jurisdiction clauses in franchise agreements and the parties can agree which courts will have jurisdiction over disputes arising from it. The jurisdiction clause can be exclusive so that only the court chosen by the parties will have jurisdiction. The clause can be drafted in favour of the franchisor only so that the franchisor has the flexibility to commence proceedings in another jurisdiction.

 

Operations Manual

26. How does the franchisor ensure that the franchisee complies with the business standards, systems and requirements?

The contents of the Operations Manual varies depending on the policies of each franchisor and the complexity of the franchised business. The Operations Manual typically includes and describes all the processes applied in the daily operation of the franchise by the franchisor and its employees. Many franchisors have more than one Operations Manual for a franchise. Separate Operations Manuals are commonly used for such diverse areas as:

  • Training.

  • Costs and cost control.

  • Money handling.

  • Purchasing.

  • Insurance and product liability.

  • Sales pitches

  • Cooking instructions.

  • Dress standards.

  • Client protocols.

  • Cleaning requirements.

An Operations Manual is essentially an expansion of the provisions contained in the franchise agreement covering operation and processes. The Operations Manual gives continued professional guidance to the franchisee. However, Operations Manuals are also a contractual protection for the franchisor by establishing the rules, standards and specifications of the franchise that the franchisee must comply with at all times. For the franchisor, it is a legally enforceable quality control document without which it could not enforce its system standards.

 
27. Can the franchisor change the Operations Manual unilaterally, as is usually required?

Operations Manuals may be subject to changes, from time to time, as the franchise evolves, in order to adjust them to:

  • New market conditions.

  • New products or services launched by the franchisor.

  • Requirements imposed by changes in the law.

  • Improvements that have been positively tested in the network.

Such changes must be justifiable and reasonable, especially if they are substantial and carry additional costs for the franchisee, such as material changes in established processes or additional training for the franchisee and its employees.

 

Liability issues

28. What are the franchisee's remedies against the franchisor for deceptive or fraudulent selling practices?

The franchisee can exercise all the actions provided for in the franchise agreement, in the Civil and Commercial Code, and in the Criminal Code, against deceptive or fraudulent conduct by the franchisor. Normally these actions also include the franchisee's right to oblige the franchisor to remedy the default and to pay a compensation for damages or to terminate the agreement and to pay a compensation for damages. Damages incurred by the franchisee include direct damages caused to the franchisee by the franchisor and any indirect damages caused to third parties for which the franchisee would be liable.

 
29. How can third-party claims against the franchisee be brought successfully against the franchisor?

Indemnity

Third-party claims against the franchisee cannot be brought successfully against the franchisor as the franchisee, as an independent contractor, is responsible for its own liabilities. If there is evidence that the franchisee is not an independent party, joint responsibility can arise and claims against the franchisor may be successful. The franchisor can bring indemnity claims against the franchisee as provided in the franchise agreement or in cases of default as provided by law. Rights of indemnification can be excluded by agreement of the parties, and are typically excluded to the benefit of the franchisor.

Precautions

The franchisor must make sure that the franchise is structured in such a way that:

  • The control of the franchisor over the decision-making of the franchisee is not absolute.

  • The franchisee is not totally dependent on the instructions and management of the franchisor.

  • The nature of the franchise is not degraded.

  • The relationship between franchisor and franchisee would not give rise to potential joint responsibility.

 

Intellectual property

30. What provisions are usually made in relation to intellectual property rights (IPRs), including know-how?

A franchise agreement must include (Royal Decree 201/2010):

  • The use of a common trade name, sign or other IPRs.

  • A uniform presentation of the franchise.

  • The technical knowledge and know-how that is proprietary, substantial and unique to the franchisor.

The IPRs that are most typically licensed in a franchise agreement in Spain are therefore know-how, trade names, trade marks and copyright and/or design rights related to the franchise and the franchise business.

 
31. What are the registration requirements for licensing IPRs?

The franchisor must provide to the franchisee pre-contractual information, including evidence of the franchisor's ownership of or licence in Spain for the IPRs licensed with the franchise (Royal Decree 201/2010).

Trade marks are acquired by registration with the Spanish Trademarks and Patents Office (OEPM) or with the Office for the Harmonisation of the Internal Market (for EU community trade marks). The registration of a trade mark requires the filing of an application with the competent regional agency where the applicant has its registered office. If the applicant is not a resident in Spain, the application must be filed with the OEPM. The official application form contains:

  • Information about the applicant.

  • A sample of the trade mark.

  • The list of goods or services with which the trade mark will be used.

  • Evidence of payment of the filing fees.

IPRs are commonly licensed to the franchisee through the franchise agreement, but can also be licensed in a separate agreement. However, franchisors usually do not register trade mark licences for each franchisee. Trade mark licence agreements can include all or part of the products or services covered by the trade mark, and their scope can include all or part of the Spanish territory. Trade mark licences can be exclusive or non-exclusive. To be effective against third parties, trade mark licence agreements must be in writing and registered with the OEPM.

A limitation imposed on the franchisee to use the licensed IPRs only within the scope of the franchise and its territory is inherent to the franchise system and therefore is common practice in franchise agreements.

 

Real estate

32. Are consents from landlords difficult to obtain when transferring leases or granting subleases from a franchisor to a franchisee?

The franchisee can freely sublease the premises or transfer the lease to the franchisor but the landlord is entitled to increase the rent of the lease by 20%. In practice, however, commercial leases commonly exclude the right to transfer the agreement and to sublease unless they are previously approved in writing by the landlord. In many cases, especially in franchise operations, the franchisee, by indication of the franchisor negotiates the lease agreement to include the right to freely transfer or sublease the premises to the franchisor. Outside these two scenarios, the consent of the landlord must be negotiated and agreed beforehand. If so, the commercial conditions of the consent can vary depending on:

  • The financial situation of the franchisee.

  • The solvency of the franchisor.

  • The disposition of the landlord.

The negotiation of the commercial terms of the landlord's consent affect the timing of the process. There are no special formalities required other than a written agreement between the franchisee, the franchisor and the landlord.

 
33. How can a franchisor prevent the franchisee from occupying the premises after the franchise agreement has ended?

The franchisor should make the term of any franchise agreement coincide with or be within the term of the lease or sublease. The franchisor may either:

  • Negotiate the term and renewal of the lease/sublease before assigning it to the franchisee on execution of the franchise agreement.

  • Ensure that the franchisee has entered into a lease/sublease agreement that coincides with the term of the franchise agreement before granting the franchise.

 
34. How can the franchisor effectively acquire the franchisee's premises at the end of the franchise relationship?

If the franchisee is the owner of the premises, the franchise agreement or a separate document should provide for a purchase option in favour of the franchisor. The basic elements of this offer should include:

  • The circumstances and time where the franchisor may exercise the option.

  • The price of the option, if agreed.

  • The purchase price and mode of payment.

  • Due diligence review by the franchisor.

  • Representations and warranties by the franchisee.

  • Any liens and charges over the property.

  • A general obligation of the franchisee to keep the property clear of further liens and charges during the term of the agreement.

  • Assignment of the purchase option by the franchisor.

  • Notarisation of the purchase.

If the franchisee is the lessee/sub-lessee, the franchise agreement should provide that the franchisor has an option to step in and subrogate the franchisee in the lease/sublease. This will be possible if substitution is authorised in the lease/sublease agreement or, where in default, prior consent is granted by the tenant/lessee.

The main practical drawback that the franchisor will encounter, apart from having to legally enforce the purchase option or the lease/sublease transfer, will be achieving material repossession and occupation of the premises to reinstate operation of the unit, especially if the franchisee challenges the process in court. If required, court intervention will delay the process and repossession of the premises will be very time consuming and have a very negative impact on the operation of the franchised outlet.

A purchase option can be registered with the land registry, and the franchisor may have its rights to step into the position of the franchisee in the lease/sublease recognised in the lead/sublease agreement, as additional assurances for the franchisor. However, in practice, if court intervention is required enforcement of the franchisors' right is far from immediate. Material repossession of the premises will only be achieved once the court decision is laid down and the physical eviction of the franchisee is finally implemented.

 
35. If the franchisor leases or subleases its own site to its franchisee, can it pass on all related costs to the franchisee? Can the franchisor charge its franchisee tenant a rent expressed as a percentage of the franchisee's sales?

The franchisor can pass on to the franchisee all costs related to its lease or sublease of the franchised site, including the rent, community charges and taxes and, eventually a mark-up on the rent, if this is agreed with the franchisee. All related costs can be charged by the franchisor to the franchisee as rent, or expressed as a percentage of the franchisee's sales, or a mix of both. In either case, the related costs charged to the franchisee for the occupancy of the franchised site should be documented as a sublease agreement.

 

Competition law

36. What is the effect of competition law rules on franchising agreements? Are there any available exemptions?

Competition law: anti-trust rules

EU competition rules apply to all forms of vertical agreements and, in particular, to franchise agreements. The prohibition and criteria established in Articles 101(1) and 101(3) of the Treaty on the Functioning of the European Union (TFEU) are the basic constitutional rules. The Vertical Restraints Block Exemption, as interpreted by the Guidelines on vertical restraints and the Notice on agreements of minor importance (OJ 2001 C368/13) (De Minimis Notice) are the terms of reference for exemptions to the general rule.

The Spanish Competition Act follows Article 101(1) of the TFEU, and establishes the legal framework on competition protection in Spain. Restrictions on competition are generally prohibited, but the Competition Act provides that vertical agreements may benefit from a national block exemption.

Exemptions

The Spanish Competition Act provides that vertical agreements may benefit from an exemption if they comply with the Vertical Restraints Block Exemption or any other block exemption adopted by the Spanish government. Consequently, franchise agreements complying with the Vertical Restraints Block Exemption, as interpreted by Guidelines on vertical restraints, benefit from a national block exemption.

Within this framework, depending on the market position of the parties, most franchising agreements should, if properly drafted and implemented, fall outside the general prohibition or qualify for the Vertical Restraints Block Exemption. Most franchise agreements should also benefit from the De Minimis Notice and the thresholds provided by it.

Online/e-commerce restrictions

The franchise agreement can provide terms and conditions, including limitations and prohibitions, under which the franchisee can:

  • Have its own website presence.

  • Promote its business on the internet (simply advertising the brand and business).

  • Engage in e-commerce (selling products or services online).

 

Employment issues

37. Can a franchisee be regarded as an employee of the franchisor?

A franchisee can be considered an employee of the franchisor in law if the franchisee is not in reality an independent contractor. If the franchise is structured in such a way that the control of the franchisor over the decision making of the franchisee is absolute and the franchisee is totally dependent on the instructions and management of the franchisor, the nature of the franchise is degraded and the relationship between franchisor and franchisee may become an employer-employee relationship. In such a case, not only can the franchisee be considered an employee of the franchisor, but also all of its employees can be regarded as employees of the franchisor.

Without their prior consent, the employees of the franchisor can only be assigned to the franchisee if they are employees of the franchise or franchises owned by the franchisor that are being transferred to the franchisee. If the franchise is sold to the franchisee as a going concern, the employees are considered employees of the going concern and are therefore automatically sold or transferred with all the assets and liabilities of the franchise. The franchisor may or may not transfer the employees of a franchise together with the franchise, but if it chooses not to assign the employees, it must keep them employed in his own operations or dismiss them and pay them the relevant severance rights.

Within the framework of a franchise purchase and sale agreement, where there is an assignment of assets and liabilities together with the granting of the franchise that form a going concern, transferred employees must be informed in advance of the transfer, but cannot veto the transfer.

 

Dispute resolution

38. How are franchising disputes typically dealt with? What provisions for handling disputes are usually included in domestic franchise agreements?

Bringing a claim

International or cross-border franchise agreements are usually subject to international institutional arbitration, especially where the amounts at stake are substantial or executive actions by the parties are of paramount importance. However, many international master franchise agreements are subject to the national or state courts of the franchisor. Local master franchise agreements and franchise agreements are commonly subject to the jurisdiction of ordinary local courts, although local institutional arbitration is becoming more common. The parties must consider their specific needs and the costs involved in each alternative.

It is also possible to establish a hybrid combination of ordinary courts and arbitration, depending on the nature of the obligations that are to be enforced by the claimant. Complex and financially substantial issues, such as repossession of premises or IPRs, purchase options, or lease/sublease transfers, require more expeditious actions and decisions by the court and should therefore be subject to arbitration.

Enforcement

When operating in certain jurisdictions, franchisors should make sure they are well advised of the risks and drawbacks involved in enforcing their agreements against a defaulting franchisee. Franchisors should also seek advice on the possibilities of forum shopping and the relevant treaties on enforcement of foreign judgments and arbitration awards before entering the franchise agreement. To avoid last minute problems, enforcement and choice of law issues should be addressed at the very start of the negotiations with the potential franchisee.

 
39. How are foreign judgments or foreign arbitral awards enforced locally?

Foreign judgments and arbitral awards are enforced by local courts without any prior formalities (other than those required for local judgments and arbitral awards), as long as the parties are from member signatory states of the relevant international treaties for the recognition of foreign judgments and arbitral awards of which Spain is a signatory.

 

Exchange control and withholding

40. Are any exchange control or currency regulations applicable to payments to an overseas franchisor?

There are no exchange control or currency restrictions on payments made to an overseas franchisor, provided that the franchisor is not located in a blacklisted tax haven.

 
41. Is there a withholding obligation on payments made to an overseas franchisor?

Payments to non-EU franchisors, where no double-tax treaty applies, may be subject to withholding of corporation tax or other taxes.

 

Reform

42. Are there any proposals to reform the laws affecting franchising?

There are currently no proposals to reform the rules specifically affecting franchise agreements. There may be forthcoming general tax and employment reforms that may affect the franchising sector.

 

Online resources

Official Spanish Gazette (Boletín Oficial del Estado)

W www.boe.es

Description. The website contains a comprehensive list of all the laws passed in the parliament, the provisions adopted by the Spanish Government and the general provisions of the Autonomous Communities.

Spanish Franchisors' Association (Asociación Española de Franquiciadores) (AEF)

W www.franquiciadores.com

Description. Association of franchisors operating in Spain.

Ministry of Economy and Finance

W www.mineco.es

Description. Responsible for the proposal and implementation of government policy on economic issues.

Franchisors Registry

W www.franquicias.comercio.es

Description. Compulsory register of franchisors in Spain.

Programa Ventanilla Única Empresarial Online (VUE online)

W www.ventanillaempresarial.org

Description. An official government pilot project giving online advisory support for entrepreneurs and the creation of businesses.

Organisation for Economic Co-operation and Development (OECD)

W www.oecd.org

Description. International economic organisation that stimulates economic progress and world trade.



Contributor profile

Alberto Echarri, Senior Partner

Echarri & Brindle

T +34 669 772 660
E aecharri@echarribrindle.com
W www.echarribrindle.com

Professional qualifications. Qualified Spain, 1984; Law graduate of the University of Madrid; Msc Tax Law, Instituto de Estudios Fiscales; Msc.Business Law, Instituto de Empresa; Diploma Comparative Law, McGill University.

Areas of practice. International arbitration; franchising

Recent transactions

  • Acting for major fast food restaurant chain in master franchise agreement in Spain.
  • Acting for major dental services franchise in international master franchise agreement.
  • Acting as arbitrator in major arbitration dispute involving international franchisor and franchisee.
  • Acting for major real estate services international franchise.
  • Acting as arbitrator in several local franchising disputes.

Languages. English, French and Spanish

Professional associations/memberships. ABA, IBA, The Law Society (International Division); Spanish Franchise Association and International Distribution Institute; several national and international arbitration institutions.

Publications. Authored or co-authored ten books and numerous articles on international contracts, M&A, franchising and arbitration, and has participated as a speaker in over three hundred national and international events. Recognised as one of the top franchise lawyers by Who's Who, the Best Lawyers and the Spanish Franchise Association.


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