Franchising in Turkey: overview
A Q&A guide to franchising in Turkey.
The Q&A provides an overview of the main practical issues concerning franchising, including current market activity; regulation of franchising; contractual issues relating to franchising agreements (including 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.
1. What have been the main developments in the franchising market over the past 12 months?
According to the most recent information from the National Franchise Association of Turkey (UFRAD) and the European Franchise Federation (EFF) statistics, there were 1,850 brand chains in Turkey in 2014. 34% of these brands were foreign, 64% were national brands and franchising was used by 78% of these brands. There were 1,471 franchisor chains in Turkey, which was more than in France and Germany.
The total number of franchisors in Turkey has tripled over the past five years. The number of branches of franchisors has reached 47,000 countrywide. Preliminary forecasts show that the volume of Turkey's franchise market has exceeded US$43 billion and was expected to reach US$50 billion in 2015 (up-to-date data is not yet available). The sector distribution of the chains is 24% in foods, 27% in merchandise, 16% in services and 33% in the clothing sector.
Turkey's foreign franchisors include global brands such as McDonald's, Domino's Pizza, Burger King, Subway and Caffè Nero. In addition, local giants like Simit Sarayi (food), Koton (clothing) and Istikbal (furniture) use franchising as their primary business model.
2. What are the most commonly used methods of local and international franchising?
The most commonly used method by the local franchisors is direct franchising. Master franchise agreements are rarely used by the local franchisors as they are already established in Turkey.
The most commonly used method by international franchisors is master franchise agreements, generally due to the tax burdens. If an international franchisor decides to enter the Turkish market through the establishment of a company, it will qualify as a Turkish resident and therefore will be subject to tax on its income derived both in Turkey and abroad. On the other hand, if an international franchisor opts for the master franchising model without establishing a presence in Turkey (legal and business centres should not be located in Turkey), it will qualify as a non-resident and subject to tax only on its income derived in Turkey.
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?
There are no specific reasons for an overseas franchisor to use a separate entity for entering into a franchise agreement with a franchisee in Turkey.
Regulation of franchising
4. What is the legal definition of franchising and/or a franchise?
There is no legal definition of franchising and/or a franchise under Turkish law.
However, the Turkish Court of Appeal in its decision dated 25 June 2001 numbered 819/4917 has defined franchising as a long-term and continuous contractual relationship between two independent parties where the party who holds the concession right of a product or service, grants this right to the other party by providing information and support relating to the commercial business to be carried out under certain conditions, limitations and for a definite period.
5. What are the laws regulating franchising?
There is no law regulating franchise agreements. However, since both agency and franchise agreements have similar characteristics, the agency provisions under the Turkish Commercial Code will by analogy be applied to franchise agreements. In addition, provisions relating to proxy and brokerage agreements and general provisions of the Turkish Code of Obligations (in respect of termination, notice periods, compensations and non-compete clauses) will also be applied to franchise agreements.
6. What is the regulatory authority responsible for enforcing franchising laws and requirements in your jurisdiction?
There is no regulatory authority responsible for enforcing franchising laws or requirements.
7. Must the franchisor be registered with a professional or regulatory body before setting up a franchise system?
There are no mandatory registration requirements in Turkey before setting up a franchise system.
8. Is there a code of ethics or other means of promoting ethical franchising in your jurisdiction?
The National Franchise Association of Turkey is a member of the European Franchise Federation. Therefore, the European Code of Ethics in its entirety is binding on the members of the National Franchise Association in Turkey and is considered as the main framework for promoting ethical franchising in Turkey.
9. Do franchisees benefit from any laws designed to protect consumers or small businesses?
Franchisees do not benefit from any laws designed to protect consumers or small businesses. Under the Turkish Consumer Protection Law, consumer is defined as a natural or legal person acting with no commercial or professional purpose. Therefore, as franchise agreements are concluded between two business persons, franchisees are not treated as consumers under existing laws and also by the Turkish courts.
10. Are there any other requirements which must be met before a business can sell a franchise?
There are no other requirements that must be met before a business can sell a franchise.
Pre-contract disclosure requirements
11. Is the franchisor subject to any general or formal pre-contract disclosure requirements?
There is no pre-contractual disclosure requirement under Turkish law. However, the Turkish Code of Obligations requires that the will of the parties must be coherent and compatible for contractual relationships to be satisfied. In addition, if a person enters into a contract as a result of the other party's deception, this will result in the invalidity of the contract.
Although not specifically regulated, the doctrine of culpa in contrahendo can expose the franchisor to certain claims of damages in this regard. Precedents established by the Turkish courts provide that even if there is no written contract, the distributor's reliance on the relationship arising from the contractual negotiations will be protected by law. Similarly, the franchisor may be exposed to damage claims for their pre-contractual statements.
If the franchise agreement is in written form and includes standardised terms that are included in many of the franchisor's other agreements, the franchisor must inform the franchisee as to the existence of these terms. Otherwise, standardised terms in the franchise agreement may be deemed invalid.
As there is no pre-contractual disclosure requirement for franchising agreements under Turkish law, the disclosure obligation of an overseas franchisor and sub-franchisor must be determined in accordance with the franchise agreement and the contractual requirements between the relevant parties. The general principle is that the liable party in this case would be the sub-franchisor as it is the party to the sub-franchising contract, assuming that there are no terms in the master franchise agreement dealing with such an issue.
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 the absence of a specific law regulating franchise agreements, the general principles under Turkish Civil Code must apply. As franchise agreements require continuing and extensive co-operation between the franchisor and the franchisee, the pre-contractual trust relationship requires the parties to diligently disclose information material to the business. All facts material to the franchisee's decision must be disclosed.
13. What are the formal contractual requirements to a valid and binding franchise agreement?
In the absence of a specific law regulating franchise agreements, the general provisions of the Turkish Code of Obligations on the formal contractual requirements apply.
Other formal contractual requirements are as follows:
In addition, trade mark transactions must be in writing to ensure that the licence agreement is valid.
Franchise agreements are not specifically regulated under Turkish law and are characterised as hybrid agreements, containing elements of both service and licence agreements without any precedence being attributed to the service or licence agreement aspects.
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?
In the absence of a specific law regulating franchise agreements, every person must exercise his rights and fulfil his obligations according to the principles of good faith (Article 2, Turkish Civil Code). However, due to the general nature of this obligation, the Turkish courts must determine what steps must be taken by the parties to satisfy it.
Obligations of the franchisee
The main obligations of the franchisee usually contained in the franchise agreement are as follows:
Obligations of the franchisor
The main obligations of the franchisor usually contained in the franchise agreement are as follows:
These provisions cannot be overridden as they are the material elements of a franchise agreement.
The franchisee is generally regarded as an independent businessman or entity and therefore its failure to satisfy its obligations usually bears no effect on the overseas franchisor.
15. Does local law require that particular provisions must be expressly included in a franchise agreement?
There are no mandatory clauses for franchise agreements. However, Turkish law recognises some general contractual rules that parties must abide by (such as provisions relating to termination, notice periods, compensation and non-compete clauses). In addition, clauses contrary to the imperative provisions of the law, ethics, public order and personal rights must be deemed null and void (Turkish Code of Obligations).
16. Are exclusion and entire agreement clauses enforceable in your jurisdiction? If so, are they effective to protect the franchisor?
Entire agreement and exclusion clauses are enforceable in Turkey and these are usually considered effective to protect the overseas franchisors. In addition, franchisees are generally regarded as independent businessmen or entities and therefore third-party claims against the franchisee are very unlikely to be brought successfully against the 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
Although there are no express restrictions on purchasing and product tying under Turkish law, it is generally accepted that these clauses should not be an issue if either the:
Franchise agreements are generally considered vertical agreements. A vertical agreement, which bears conditions that restrict competition, can be considered to be in breach of Turkish competition law. However, there is a Block Exemption Communiqué on Vertical Agreements (Communiqué), which allows vertical agreements to be exempted from restrictions under Turkish Competition Law, provided that certain requirements are fulfilled. Although the Communiqué does not refer to product tying, this practice may not raise concern if either:
Non-compete obligations and transfer restrictions
The Communiqué describes non-compete obligations as any kind of obligation that directly or indirectly prevents the franchisee from producing, purchasing, selling or reselling goods or services, which compete with the goods and services that are subject to the agreement. In addition, any direct or indirect obligation on the franchisee to purchase from the franchisor, or from any undertaking designated by the franchisor, more than 80% of the subject goods or services or their substitutes in the relevant market, calculated on the basis of the value of its purchases in the preceding calendar year is a non-compete obligation.
In a vertical agreement, the maximum duration of a non-compete obligation can be determined as five years (Article 5(a) Communiqué). Non-compete obligations with indefinite terms are prohibited and the exemption provided under the Communiqué will not apply to these non-compete clauses under a franchise agreement. This would not only invalidate the relevant terms of the agreement but also result in serious penalties as the activities of the parties will be considered to be against the Law on Protection of Competition.
There are no legal restrictions on the ability of the franchisor to require its prior consent to transfers of the business and/or transfers of interests in the entity owning the business under Turkish Law. This can be included in the franchise agreement.
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?
There are no restrictions in this regard so parties can determine which fees apply. However, the parties should also consider taxation and who is liable for this under the agreement. In practice, franchisors tend state that the franchisee is responsible for the payment of stamp duty, notarisation fees (if necessary) and fees related to the registration of a trade mark licence agreement.
Interest can be charged on overdue payments and the maximum amount that can be determined by the parties is twice the interest rate designated by law in the relevant year.
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?
In practice, franchise agreements are generally executed for a definite term (for three, five or in some cases ten or 15 years) and include an extension provision. However, the non-compete obligations contained in franchise agreements must not exceed five years (see Question 17).
20. What rights of renewal are usually included in the franchise agreement? Are fees paid on renewal?
In practice, franchise agreements usually include provisions for the option to renew the agreement subject to the franchisee fully complying with the terms and conditions of the franchise agreement.
There are no legal requirements concerning the right of renewal or fees payable on renewal under Turkish law. Therefore, in accordance with the general principle of contractual freedom, the franchisor can refuse to renew the agreement with the franchisee (assuming that a unilateral right of renewal is not granted to the franchisee under the franchising agreement between the parties).
If the franchisor does not renew the agreement and the franchising agreement expires, the franchisee can claim for ''portfolio compensation'' in the event that it brought a considerable numbers of new clients for the franchisor and the franchisor benefited from the expanded customer portfolio. However, the amount of portfolio compensation cannot exceed the average of fees and other payments collected by the franchisee during the course of the last five years (Turkish Commercial Code).
21. Are there any limitations on the right of a franchisor to terminate the agreement?
In the absence of a specific law regulating franchise agreements, general provisions of Turkish law apply. Therefore, a franchisee can terminate a fixed term agreement if there is justifiable cause, such as the repetitive non-payment of royalty fees, continuous lack of technical assistance and so on. A franchisor can terminate an agreement signed for an indefinite period by giving termination notice at any time.
The parties can agree on the amount of compensation due to the termination or non-renewal of the franchise agreement. The franchisor can terminate the agreement and can also ask for damages arising from the franchisee's breach. A franchisor is not obliged to pay the portfolio compensation if the franchisee is the defaulting party in the termination of the franchise agreement. In addition, if the franchise agreement is terminated by the franchisee, the franchisor is not obliged to pay the portfolio compensation (see Question 20, Local law).
The parties can determine the justifiable causes for terminating a franchise agreement for a fixed term. However, in all cases, the courts will consider whether the cause indicated by a party constitutes a justifiable cause or not. In general, if the continuation of the franchising relationship becomes unbearable for one of the parties, the courts may consider this a justifiable cause.
Contractual penalties and liquidated damages are enforceable and parties can determine the relevant amounts. However, excessive amounts of contractual penalties can be reduced by the courts on the ground they are unreasonable.
22. Are post-term restrictive covenants enforceable?
Post-term non-compete restrictive covenants in franchise agreements should be limited in terms of time, place and subject and should not result in economic destruction of the franchisee. A post-term non-compete restrictive covenant may be deemed invalid by the courts, to the extent that it eliminates or reduces the economic independence and jeopardises the economic condition of the franchisee.
Unless the franchise agreement explicitly provides a post-term confidentiality restrictive covenant, it is unlikely that Turkish courts will grant its injunction. However, the principle of good faith must also be taken into account by the courts.
Under the Block Exemption Communiqué on Vertical Agreements (Communiqué), any direct or indirect obligation imposed on the purchaser, prohibiting it from producing, purchasing, selling or reselling goods or services is defined as a non-compete obligation. A non-compete obligation is only valid if all of the following applies:
The Turkish courts are less reluctant to grant injunctions in the event that the franchisee continues to operate the business or use the assets and IP rights transferred or made available for the sole purpose of running the franchised business. In this case, the franchisee would be liable for unfair competition.
23. Can the franchisor or a replacement franchisee continue to sell to the former franchisee's customers?
The franchisor or a replacement franchisee can continue to sell to the former franchisee's customers. However, the franchisee can claim for ''portfolio compensation'' (see Question 20).
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?
Local courts can recognise and uphold choice of foreign law clauses. However, mandatory provisions of Turkish law (such as rules regulating public order) still apply.
25. Will local courts recognise a choice of foreign jurisdiction in a franchise agreement for a business operating in your jurisdiction?
The local courts will recognise a choice of foreign jurisdiction in a franchise agreement, provided that both:
26. How does the franchisor ensure that the franchisee complies with the business standards, systems and requirements?
The franchisee must comply with the rules set out in the Operations Manual and the franchisor's instructions, given within the scope of the objectives of the franchising system. The scope of the franchisee's duty to comply with instructions of the franchisor is extensive and relates to almost every aspect of the activities of the company.
The franchisor cannot vary instructions previously provided if they are contrary to the objective of the franchise agreement. The franchisee's obligation to follow the instructions of the franchisor exists as long as these instructions are consistent with the:
27. Can the franchisor change the Operations Manual unilaterally, as is usually required?
See Question 26.
28. What are the franchisee's remedies against the franchisor for deceptive or fraudulent selling practices?
The franchisee can apply for the deceptive or fraudulent practices to be ceased and ask for compensation in respect of damages suffered as a result of these practices.
29. How can third-party claims against the franchisee be brought successfully against the franchisor?
A franchisee is generally regarded as an independent businessman or entity so third-party claims against the franchisee cannot usually be brought against the franchisor. An exception to this is in the event of spin-offs structured in the form of an asset deal or business transfer. In these circumstances, the transferor of a business will be jointly liable with the transferee (for the liabilities arising out of the business prior to the transfer) for a period of two years following the transfer of the business.
In addition, the franchisee can claim against the franchisor for losses related to third-party claims, provided they are the result of a defect in the production, management or marketing system imposed on the franchisee by the franchisor. These claims can be excluded by contract, save for the cases of wilful misconduct or misleading conduct by the franchisor.
Franchisors often include an indemnification clause in the franchise agreement, which requires the franchisee to indemnify the franchisor for the claims arising out of his operations.
The franchisor can also publicise the franchisee's independence by publishing the business transfer arrangement or the de-merger resolution in the Trade Registry Gazette.
30. What provisions are usually made in relation to intellectual property rights (IPRs), including know-how?
The franchisor must grant the franchisee the right to use its intangible assets (such as patents, trade marks, corporate name, trade name of the commercial enterprise and know-how) which are essential for the operation of the franchise system. However, the franchisor can set certain limits to the use of IPRs and confidential information, which is generally done by way of a licence agreement registered with the Turkish Patent Institute. In this licence agreement, the franchisor can prescribe the terms and conditions applicable to the use of IPRs provided. If the franchisee violates any of the terms and conditions, the franchisor can terminate the licence agreement and deny the franchisee's access to the IPRs.
31. What are the registration requirements for licensing IPRs?
Under Turkish law, copyright is granted automatically by the Turkish Code on Intellectual and Artistic Works and therefore no registration is required for the protection of rights other than for cinematographic and musical works and video games. However, formal registration is required for protection of IPRs such as trade marks, patents and industrial designs The competent body for the registration of trade marks and industrial designs is the Turkish Patent Institute (TPI).
An invention can also be registered as a patent or a utility model. The registration of the patent allows the parties to enjoy the protection of IPRs and the competent body is also the TPI.
Under Turkish law, it is not necessary to have a separate licence and franchise agreement. A separate licence agreement or franchise agreement can be registered with the TPI. If registered, these agreements will allow the parties to refer to the registered documents in the case of a dispute.
32. Are consents from landlords difficult to obtain when transferring leases or granting subleases from a franchisor to a franchisee?
A lease agreement cannot be transferred to another person without the landlord's written consent (Article 323, Turkish Code of Obligations). However, the landlord can only refuse to give consent if he has a valid reason. In practice, landlords tend to give this consent in return of a payment called an ''ingoing'' (that is, a sum of money that can be freely determined by the landlord in return for its consent). The landlord's consent to the transfer of the lease or the granting of the sublease can be obtained by amending the existing lease agreement. If the original lease agreement is registered with the Turkish Land Registry, the amendments must also be registered. In practice, the transfer of the lease can be completed within two to three business days.
33. How can a franchisor prevent the franchisee from occupying the premises after the franchise agreement has ended?
The franchisor can prevent the franchisee from occupying the premises after the franchise agreement has ended by ensuring that the expiry or termination of the franchise agreement would also result in the termination of the lease or sublease granted to the franchisee. Generally, this is done by drafting the termination clause of the lease agreement so that the lease agreement regarding the use of the concerned real estate comes to an end on expiry or termination of the franchise agreement.
34. How can the franchisor effectively acquire the franchisee's premises at the end of the franchise relationship?
If the real estate to be purchased by the franchisee is owned by the franchisor, the franchisor can acquire title to the real estate at the end of the franchise term by way of a repurchase agreement to be signed between the parties. On the other hand, if a third-party owns the real estate to be purchased by the franchisee, the franchisor must conclude a promise of sale in written form with the franchisee stating that the franchisor can acquire the title of the real estate when the franchise term has come to an end.
Despite being non-mandatory, it is recommended that the purchase agreement is registered with the relevant land registry in order to grant enforceability to the repurchase right and prevent third party claims made in good faith. However, the repurchase agreement must have a maximum term of ten years.
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?
Under Turkish law, lease and sublease agreements are flexible. In this respect, the franchisor can pass its site-related costs to the franchisee and charge a rent expressed as a percentage of the franchisee's sales, provided that these terms are incorporated into the lease or sublease agreement.
36. What is the effect of competition law rules on franchising agreements? Are there any available exemptions?
The Competition Law and the relevant secondary legislation are very similar to the EU competition legislation. All agreements that have as their objective, effect or likely effect, the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods and services are illegal and prohibited (Article 4, Competition Law).
Despite the above restrictions, there are the following exemptions (Block Exemption Communiqué on Vertical Agreements):
There is no regulation that prohibits a franchisee from having its own website presence, from promoting its business on the internet (simply advertising the brand and business), or from engaging in e-commerce (selling products or services online). These restrictions/prohibitions can be decided mutually by both parties under the principle of contractual freedom.
37. Can a franchisee be regarded as an employee of the franchisor?
The relationship between the franchisor and the franchisee has not been treated as one of employer-employee by the Turkish courts.
38. How are franchising disputes typically dealt with? What provisions for handling disputes are usually included in domestic franchise agreements?
Franchising disputes are typically dealt with by litigation in the local courts. Arbitration is sometimes preferable for parties to franchise agreements, due to the fact that the trials before the Turkish courts are usually lengthy. However, the recognition of arbitral awards in Turkey also takes a considerable amount of time.
Since the Law of Mediation for Civil Law Disputes numbered 6325 entered into force on 22 June 2012, mediation has also become a recognised form of native dispute resolution.
In disputes between an overseas franchisor and the local franchisee or master franchisee, the parties can freely determine the jurisdiction and governing law in the agreement, provided that there is a foreign element in the case and the court assigned by law is not exclusively competent (Code concerning Private International Law and Civil Procedure).
39. How are foreign judgments or foreign arbitral awards enforced locally?
Turkey is a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention).
Turkey also has reciprocity agreements with other non-New York Convention signatories. In these cases, Turkish courts readily recognise arbitral awards granted by these non-signatory countries. Under Turkish law, the enforcement of a foreign judgment is subject to the following conditions (Turkish International Private and Civil Procedure Code):
Exchange control and withholding
40. Are any exchange control or currency regulations applicable to payments to an overseas franchisor?
Investors can freely transfer the following abroad:
However, banks must report outbound flow of Turkish lira and foreign currency exceeding certain amounts (such as US$50,000) to the Central Bank of Turkey (Decree numbered 32, Protection of Value of the Turkish Currency).
41. Is there a withholding obligation on payments made to an overseas franchisor?
If a foreign franchisor decides to enter the Turkish market by incorporating a company in Turkey, it will be qualified as a Turkish resident and subject to tax on its income derived both in Turkey and abroad. However, if a foreign franchisor opts for the master franchising model without establishing any presence in Turkey (legal and business centres should not be located in Turkey), it will qualify as a non-resident and will be only subject to tax on its income derived in Turkey.
42. Are there any proposals to reform the laws affecting franchising?
Although not specifically related to franchising, the Industrial Property Law entered into force on 10 January 2017.
Previously, the protection of industrial rights (including trade marks, geographical indications, designs, patents, utility models and conventional product names) was mostly governed by separate decree laws. The Industrial Property Law harmonised all industrial rights under one uniform law and its reforms relating to trade mark law include the ability to register new kinds of marks, shorter registration periods, trade mark co-existence, administrative invalidation, and the regulation of procedures relating to international applications in accordance with the Common Regulations under the Madrid Agreement concerning the International Registration of Marks and the Protocol Relating to that Agreement 2004.
To date, there are no proposals to introduce voluntary self-regulation in relation to franchising.
Ilknur Peksen, Partner ErsoyBilgehan Lawyers and Consultants
Leyla Ulucan, Senior Associate ErsoyBilgehan Lawyers and Consultants
Yusuf Mansur Özer, Associate ErsoyBilgehan Lawyers and Consultants
Şule Akkuş, Legal Trainee ErsoyBilgehan Lawyers and Consultants
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