1 Relevant Legislation and Rules Governing Franchise Transactions
1.1 What is the legal definition of a franchise?
There is no definition of franchise under Turkish laws. Turkish Court of Appeals defines franchise as a "long-term continuous contractual relationship between two independent parties, whereby a party, which owns the rights of a product or service, grants the second party the right to conduct the commercial business subject to the said rights by providing information and support with regard to the management and organisation of the business for a certain duration and under certain conditions and restrictions".
1.2 What laws regulate the offer and sale of franchises?
There is no legislation in Turkey that specifically deals with franchising. Particularly the below laws, among others, apply to franchising in Turkey:
- Turkish Code of Obligations.
- Turkish Commercial Code.
- Turkish Industrial Property Law.
- Intellectual Property Rights Law.
- Law on the Protection of Competition.
- Tax Procedure Law.
- Stamp Tax Law.
- Corporate Tax Law.
Additionally, other industry-specific laws and regulations may apply.
1.3 If a franchisor is proposing to appoint only one franchisee/licensee in your jurisdiction, will this person be treated as a "franchisee" for purposes of any franchise disclosure or registration laws?
There are no registration or disclosure requirements to be met for franchising in Turkey. There is also no distinction between a sole franchisee and multiple franchisee in this regard.
1.4 Are there any registration requirements relating to the franchise system?
No, there aren't any registration requirements in relation to the franchise system.
1.5 Are there mandatory pre-sale disclosure obligations?
No, there aren't any pre-sale disclosure obligations.
1.6 Do pre-sale disclosure obligations apply to sales to sub-franchisees? Who is required to make the necessary disclosures?
This is not applicable in Turkey.
1.7 Is the format of disclosures prescribed by law or other regulation, and how often must disclosures be updated? Is there an obligation to make continuing disclosure to existing franchisees?
This is not applicable in Turkey.
1.8 Are there any other requirements that must be met before a franchise may be offered or sold?
No, there are no other requirements.
1.9 Is membership of any national franchise association mandatory or commercially advisable?
There is no mandatory membership of any franchise association. Franchisors and franchisees may voluntarily choose to join general franchise or industry-specific associations.
1.10 Does membership of a national franchise association impose any additional obligations on franchisors?
As explained above, there is no mandatory membership of any national franchise association. Each franchise association, however, may impose additional rules by its by-laws.
1.11 Is there a requirement for franchise documents or disclosure documents to be translated into the local language?
This is not applicable in Turkey.
2 Business Organisations Through Which a Franchised Business can be Carried On
2.1 Are there any foreign investment laws that impose restrictions on non-nationals in respect of the ownership or control of a business in your jurisdiction?
Generally speaking, there is no restriction on non-nationals in respect of the ownership or control of a business in Turkey. Foreign nationals or legal entities are generally subject to the same legal regime with respect to ownership and control of business. For the company incorporation, however, additional documentation is required from foreign nationals and legal entities (such as apostilled versions of the documents which are required for Turkish nationals and legal entities). Additionally, while opening a bank account in Turkey, companies with foreign shareholding are subject to relatively heavier know-your-customer requirements. These, however, generally do not create significant obstacles.
Conducting activities in some industries, however, require a majority Turkish shareholding and control. These industries include weapons and defence, private schools (except for international schools), internal aviation and maritime transportation for commercial purposes.
2.2 What forms of business entity are typically used by franchisors?
Joint stock companies and limited companies are the most commonly used company forms in Turkey. There are no restrictions or requirements as to which model or form may be used, but as these two company types differ in various aspects, a detailed analysis is required in order to choose the appropriate form.
2.3 Are there any registration requirements or other formalities applicable to a new business entity as a pre-condition to being able to trade in your jurisdiction?
In order to operate a business in Turkey, registration with the Trade Register is required. Further, there may be additional industry-specific registration requirements. Product approvals or registrations may also be required for certain industries.
3 Competition Law
3.1 Provide an overview of the competition laws that apply to the offer and sale of franchises.
In Turkey, Law no. 4054 on the Protection of Competition is the primary legislation dealing with competition law, including anti-competitive agreements and abuse of dominance. It prohibits the agreements and concerted practices between undertakings, and decisions and practices of associations of undertakings which have as their object or effect or likely effect the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods or services. Turkish Competition Authority is the general regulatory authority with regard to competition law, and the Competition Board is its management body. Turkish Competition Board's Block Exemption Communiqué on the Vertical Agreements provides a block exemption for vertical agreements fulfilling certain conditions. Furthermore, Guidelines on Vertical Agreements provide details on the Competition Authority's interpretation of the law and the block exemption communiqué.
3.2 Is there a maximum permitted term for a franchise agreement?
There is no maximum permitted term for a franchise agreement.
3.3 Is there a maximum permitted term for any related product supply agreement?
There is no maximum permitted term for any related product supply agreement.
3.4 Are there restrictions on the ability of the franchisor to impose minimum resale prices?
Yes. Resale price maintenance is prohibited under Turkish Competition Law.
3.5 Encroachment – are there any minimum obligations that a franchisor must observe when offering franchises in adjoining territories?
There are no minimum obligations.
3.6 Are in-term and post-term non-compete and non-solicitation of customers covenants enforceable?
In-term non-compete covenants are enforceable as long as the franchise agreement carries the conditions for block exemption (e.g. the franchisor's market share does not exceed 40%).
Post-term non-compete covenants of a maximum term of one year are enforceable as long as the franchise agreement carries the conditions for block exemption and provided that the non-compete obligation is (i) limited to the competing goods or services, (ii) limited to the facilities or land where the franchisee has operated during the agreement, and (iii) necessary to protect the know-how transferred by the franchisor to the franchisee.
Non-solicitation covenants are also deemed a type of non-compete covenants, therefore the above rules apply thereto.
4 Protecting the Brand and other Intellectual Property
4.1 How are trade marks protected?
Trade marks are protected under the Industrial Property Law. This law confers territorial protection for marks which are registered in Turkey. Although infringement of an unregistered mark is actionable under Turkish Commercial Code's unfair competition law rules, it is recommended that all marks are registered in Turkey.
4.2 Are know-how, trade secrets and other business-critical confidential information (e.g. the Operations Manual) protected by local law?
From a civil-law perspective; know-how, trade secrets and other business-critical confidential information are protected within the framework of Turkish Commercial Code's unfair competition law rules. Those who face an act of unfair competition may request from the court certain remedies, including, but not limited to, the prevention of the unfair competition and indemnification.
From a criminal law perspective, first, acts of unfair competition that are listed under the Turkish Commercial Code are subject to an imprisonment of up to two years or a monetary fine. Note that the imprisonment can be postponed under certain conditions. Moreover, those who illegally disclose trade secrets that he knows due to his title, duty or profession are subject to an imprisonment of one to three years.
4.3 Is copyright (in the Operations Manual or in proprietary software developed by the franchisor and licensed to the franchisee under the franchise agreement) protected by local law?
The copyright is protected under Law No. 5846 on Intellectual and Artistic Works. In order to have protection under the said Law, the operation manual and/or software should have the qualification of a work as defined in the Law. Additionally, there are provisions in Turkish Penal Law (Article 243 and 244) titled Cyber Crimes.
5.1 What are the remedies that can be enforced against a franchisor for failure to comply with mandatory disclosure obligations? Is a franchisee entitled to rescind the franchise agreement and/or claim damages?
As stated earlier, Turkish law does not impose any mandatory disclosure obligation on the franchisor. As a result, no specific remedy is available to the franchisee.
5.2 In the case of sub-franchising, how is liability for disclosure non-compliance or for pre-contractual misrepresentation allocated between franchisor and master franchisee? If the franchisor takes an indemnity from the master franchisee in the Master Franchise Agreement, are there any limitations on such an indemnity being enforceable against the master franchisee?
As stated earlier, Turkish law does not impose any mandatory disclosure obligation on the franchisor. In terms of contractual liability, however, liability for pre-contractual misrepresentation in terms of data disclosed being incomplete, inaccurate or misleading belongs to the party which misrepresents such data, provided that such misrepresentation is due to such party's fault.
5.3 Can a franchisor successfully avoid liability for pre-contractual misrepresentation by including disclaimer clauses in the franchise agreement?
Under Turkish law, limitation of liability provisions are valid only for liability due to slight fault. In other words, contractual liability cannot be limited or avoided for wilful misconduct or gross fault. Avoiding liability for pre-contractual misrepresentation by disclaimer clauses is only possible for slight faults.
Note that, limitation of liability clauses are invalid also for slight faults if the relevant party's services or operations require expertise and conducted under a governmental permit.
5.4 Does the law permit class actions to be brought by a number of aggrieved franchisees and, if so, are class action waiver clauses enforceable?
No, class action is not available in Turkey.
6 Governing Law
6.1 Is there a requirement for franchise documents to be governed by local law? If not, is there any generally accepted norm relating to choice of governing law, if it is not local law?
Under Turkish law, contractual relationships that include a foreign element are permitted to be governed by foreign law. Turkish law does not directly define the "foreign element", but it is generally accepted that agreements carry a foreign element if, for example, at least one party is a non-Turkish individual or entity and/or the goods and services are supplied to, or from, abroad.
6.2 Do the local courts provide a remedy, or will they enforce orders granted by other countries' courts, for interlocutory relief (injunction) against a rogue franchisee to prevent damage to the brand or misuse of business-critical confidential information?
If parties have chosen Turkish courts' jurisdiction in the agreement (or another mutually executed document), or if the parties have not chosen any court or arbitration to have jurisdiction over the disputes and Turkish courts are, according to Turkish international private law rules, competent in terms of the disputes, it is possible to apply to Turkish courts for interlocutory relief (injunction) against a rogue franchisee to prevent damage to the brand or misuse of business-critical confidential information.
To enforce orders granted by other countries' courts or arbitral tribunals for interlocutory relief (injunction), a recognition or enforcement decision from Turkish courts must be obtained. Obtaining a recognition or enforcement decision from Turkish courts requires a number of conditions to be met, the most significant being reciprocity, in terms of enforcement, of foreign court rulings or arbitral awards (as the case may be). The reciprocity may be established by an international treaty, by law or by practice.
6.3 Is arbitration recognised as a viable means of dispute resolution and is your country a signatory to the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Award? Do businesses that accept arbitration as a form of dispute resolution procedure generally favour any particular set of arbitral rules?
Turkey is party to the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards (the "New York Convention"). Therefore, the conditions under the New York Convention apply for the recognition and enforcement of foreign arbitral awards in Turkey. Note, however, that Turkey has ratified the New York Convention with the reservation that, for a foreign arbitral award to be recognised or enforced in Turkey, it must be made in the territory of another contracting state.
The businesses that accept arbitration as a form of dispute resolution procedure does not favour any particular set of arbitral rules.
7 Real Estate
7.1 Generally speaking, is there a typical length of term for a commercial property lease?
Under Turkish law, there is no mandatory minimum or maximum term for a commercial property lease. However, in particular the shopping mall management companies generally prefer to execute lease agreements for shops for five years.
7.2 Is the concept of an option/conditional lease assignment over the lease (under which a franchisor has the right to step into the franchisee/tenant's shoes under the lease, or direct that a third party (often a replacement franchisee) may do so upon the failure of the original tenant or the termination of the franchise agreement) understood and enforceable?
Under Turkish law, the assignment of a lease to a third party is only possible when there is a provision authorising such assignment in the lease agreement. In other words, unless otherwise provided in the lease agreement, a tenant cannot assign the lease to a third party, including the franchisor, without the landlord's consent unless the agreement explicitly permits such assignment. Therefore, solely the failure of the original tenant or termination of the franchise agreement shall not suffice for a lease assignment to the franchisor.
7.3 Are there any restrictions on non-national entities holding any interest in real estate, or being able to sub-lease property?
Under Turkish law, non-national entities can own real estate in Turkey only within the scope of specific laws. These specific laws are Tourism Incentives Law (Law no. 2634), Industrial Zones Law (Law no. 4737) and Petroleum Law (Law no. 6326).
Furthermore, Turkish entities with a foreign shareholding of 50% or more are permitted to own real estate in Turkey with an approval of the military authorities or the governorships, which examine whether the real estate is located in a prohibited military zone, military security zone or special security zone.
Leasing or sub-leasing a commercial real estate in Turkey would be deemed a commercial activity, which is possible only by establishing a legal presence in Turkey (e.g. a liaison office, branch or legal entity, depending on the types of commercial activity).
7.4 Give a general overview of the commercial real estate market. Specifically, can a tenant reasonably expect to secure an initial rent free period when entering into a new lease (and if so, for how long, generally), or are landlords demanding "key money" (a premium for a lease in a particular location)?
Although there is no obligation to provide such securities under Turkish law, tenants are generally expected to deposit cash or a bank letter of guarantee in an amount equal to two to six month's rental fee.
Landlords generally do not demand "key money" for leases in particular locations. In some cases, however, the former lessees demand key money to terminate their lease agreement and exit the leased premises. This is also common if the former lessee has made non-removable investments in the leased property.
8 Online Trading
8.1 If an online order for products or request for services is received from a potential customer located outside the franchisee's exclusive territory, can the franchise agreement impose a binding requirement for the request to be re-directed to the franchisee for the territory from which the sales request originated?
No. Online orders for products or request for services from a potential customer outside the franchisee's exclusive territory are deemed passive sales. A contractual obligation on the franchisee to re-direct such orders are deemed a ban on passive sales. Prohibition of passive sales in vertical agreements is generally prohibited.
8.2 Are there any limitations on a franchisor being able to require a former franchisee to assign local domain names to the franchisor on the termination or expiry of the franchise agreement?
No, there is no limitation on a franchisor to require a former franchisee to assign local domain names to the franchisor on the termination or expiry of the franchise agreement. It is, however, recommended to regulate the assignment of domain names upon expiry or termination in the agreement.
9.1 Are there any mandatory local laws that might override the termination rights that one might typically expect to see in a franchise agreement?
No. However, franchisors are recommended to observe the following Turkish law formalities on the termination of agreements, irrespective of the contractual choice of law: Turkish law requires the termination notices between merchants to be served via (Turkish) notary public; registered mail; or telegraph or registered email using secure e-signature. Among these, the recommended method, due to its practicality and power of proof, is notary public. Although it is not clear whether the foregoing is a mandatory Turkish law rule, parties are recommended to observe it to avoid any discussion on the validity of the termination.
9.2 Are there local rules that impose a minimum notice period that must be given to bring a business relationship that might have existed for a number of years to an end, which will apply irrespective of the length of the of notice period set out in the franchise agreement?
No. However, in light of the good faith rules, it is recommended to grant notice periods that would enable the other party to reorganise its business due to termination. For a franchise agreement, such notice period is recommended to be three to nine months, depending on the particulars of the case.
10 Joint Employer Risk and Vicarious Liability
10.1 Is there a risk that a franchisor may be regarded as a joint employer with the franchisee in respect of the franchisee's employees? If so, can anything be done to mitigate this risk?
Under Turkish law, the franchisor is not deemed a sub-employer or joint-employer in respect to the franchisee's employees. In order to avoid doubts, it is recommended to include provisions in the franchise agreement setting out the parties' relations with and obligations vis-à-vis the franchisee's employees.
10.2 Is there a risk that a franchisor may be held to be vicariously liable for the acts or omissions of a franchisee's employees in the performance of the franchisee's franchised business? If so, can anything be done to mitigate this risk?
In a typical franchisor-franchisee relationship, the franchisor would not be considered as a sub-employer or joint-employer in respect to the franchisee's employees. As a result, a franchisor may not be held vicariously liable for the acts or omissions of franchisee's employees in the performance of the franchisee's franchised business. As noted above, in order to mitigate the risk, it is recommended to include provisions in the franchise agreement setting out the parties' relations with and obligations vis-à-vis the franchisee's employees.
11 Currency Controls and Taxation
11.1 Are there any restrictions (for example exchange control restrictions) on the payment of royalties to an overseas franchisor?
There are no restrictions.
11.2 Are there any mandatory withholding tax requirements applicable to the payment of royalties under a trade mark licence or in respect of the transfer of technology? Can any withholding tax be avoided by structuring payments due from the franchisee to the franchisor as a management services fee rather than a royalty for the use of a trade mark or technology?
Royalty payments from a resident franchisee to a non-resident franchisor operating without a permanent establishment in Turkey are subject to withholding tax at a rate of 15% unless reduced by a relevant double-tax avoidance treaty.
As regards the option of structuring payments as a management service fee, this is in principle possible, but the franchisee would, in a tax inspection, be required to demonstrate that the services have actually been rendered. Otherwise, tax authorities may treat these payments as royalty fees and claim the difference between the tax due on royalty payments and the tax actually paid, with applicable interest and penalties.
11.3 Are there any requirements for financial transactions, including the payment of franchise fees or royalties, to be conducted in local currency?
There are no such requirements.
12 Commercial Agency
12.1 Is there a risk that a franchisee might be treated as the franchisor's commercial agent? If so, is there anything that can be done to help mitigate this risk?
No. However, certain Turkish law provisions on commercial agency apply to franchise agreement, too. Among these, the goodwill compensation rules are the most significant ones:
Turkish law generally entitles commercial agents to a goodwill compensation when the relationship expires or is terminated, provided that the principal would continue to benefit from the customer base and market reputation developed by the agent even after the agreement's end, unless (i) the agent terminates the agreement without legitimate cause attributable to the principal, or (ii) the principal terminates the agreement with legitimate cause due to the agent's fault.
Turkish law also stipulates that this rule applies to other continuous contractual relations where exclusive rights are granted, such as exclusive distribution and franchise.
Turkish law sets out the upper limit of the goodwill compensation for the agents: The amount of goodwill compensation awarded may not exceed the average annual commission paid to the agent for the previous five years. If the agency relationship existed for less than five years, the average of the entire term serves as the basis for calculation. By way of analogy, it is generally accepted that that the upper limit for an exclusive franchisee's goodwill compensation entitlements may be the average annual profits of the distributor. It is however unclear whether this profit is the gross or net profit.
Court precedent, moreover, indicates that calculation of an "appropriate" amount, as determined by a court-appointed expert, should take into consideration: (i) the term of the contractual relationship; (ii) the franchisee's market share; (iii) the franchisee's efforts to market the goods or services; (iv) the nature of the goods or services; and (v) the quality and reliability of the goods or services and trade marks.
In Turkish law and court precedent, there is no clarity on whether the goodwill compensation rules are overriding mandatory law rules or not. The High Court of Appeals, however, decided in one case that it is not competent over the goodwill compensation dispute due to contractual choice of foreign courts. We believe that this high court decision provides grounds to defend that goodwill compensation rules are not overriding mandatory law rules.
To avoid mitigating this risk for the franchisors, we generally advise (i) not appointing the franchisees on an exclusive basis and making direct sales into or appointing other franchisees in the territory, (ii) including a choice of foreign law and foreign forum provision in the agreement, and (iii) when terminating the agreement, doing it with legitimate cause due to the agent's fault.
13 Good Faith and Fair Dealings
13.1 Is there any overriding requirement for a franchisor to deal with a franchisee in good faith and to act fairly in its dealings with franchisees according to some objective test of fairness and reasonableness?
No, unless the franchisor is in a dominant position in the market. If the franchisor is in a dominant position, it is under a no-discrimination obligation.
14 Ongoing Relationship Issues
14.1 Are there any specific laws regulating the relationship between franchisor and franchisee once the franchise agreement has been entered into?
The relationship between a franchisor and a franchisee is primarily governed by the franchise agreement. Additionally, the relationship between them would be regulated as per various laws and regulations which are specific to the business being undertaken. Please also refer to our response under question 1.2.
15 Franchise Renewal
15.1 What disclosure obligations apply in relation to a renewal of an existing franchise at the end of the franchise agreement term?
No disclosure requirements exist in relation to a renewal of an existing franchise at the end of its term.
15.2 Is there any overriding right for a franchisee to be automatically entitled to a renewal or extension of the franchise agreement at the end of the initial term irrespective of the wishes of the franchisor not to renew or extend?
There is no such right.
15.3 Is a franchisee that is refused a renewal or extension of its franchise agreement entitled to any compensation or damages as a result of the non-renewal or refusal to extend?
Goodwill compensation rules apply at the end of expiry, too. Please see our response to question 12.1 above in this regard.
16 Franchise Migration
16.1 Is a franchisor entitled to impose restrictions on a franchisee's freedom to sell, transfer, assign or otherwise dispose of the franchised business?
Under Turkish law, assignment of agreement (or an obligation) is subject to the other party's consent. Therefore, unless otherwise stipulated in the franchise agreement, franchisees are not entitled to assign the franchise agreement or their obligations thereunder to a third party. It is, however, recommended to include a provision in the agreement prohibiting such transfers without the franchisor's prior written consent.
If stipulated under the franchise agreement, a franchisor may also restrict a franchisee's ability to sell, transfer, assign or otherwise dispose of the franchised business even if such acts are not deemed assignment of agreement or obligations. Even if such provisions exist under the agreement, however, the franchisor may not be able to prevent the franchisee from doing so, but rather may solely claim damages due to breach of contract, depending on the type of the restriction.
16.2 If a franchisee is in breach and the franchise agreement is terminated by the franchisor, will a "step-in" right in the franchise agreement (whereby the franchisor may take over the ownership and management of the franchised business) be recognised by local law, and are there any registration requirements or other formalities that must be complied with to ensure that such a right will be enforceable?
Generally speaking, a franchisor can step into the shoes of a franchisee if stipulated in the franchise agreement. The franchisor, to be able to conduct the franchised business on its own, would be required to incorporate a subsidiary in Turkey. Further, taking over some rights or assets may be subject to third parties' consents, such as lease agreements.
16.3 If the franchise agreement contains a power of attorney in favour of the franchisor under which it may complete all necessary formalities required to complete a franchise migration under pre-emption or "step-in" rights, will such a power of attorney be recognised by the courts in the country and be treated as valid? Are there any registration or other formalities that must be complied with to ensure that such a power of attorney will be valid and effective?
Under Turkish law, powers of attorney are subject to strict formal and content requirements. These include the power of attorney certified – and for some powers, prepared – by a notary public. Further, some representation rights need explicit and detailed formulation of these rights in the power of attorney. Furthermore, powers of attorney can be withdrawn at any time. Therefore, a power of attorney in the franchise agreement is unlikely to be enforceable in terms of pre-emption or "step-in" rights.
17 Electronic Signatures and Document Retention
17.1 Are there any specific requirements for applying an electronic signature to a franchise agreement (rather than physically signing a "wet ink" version of the agreement), and are electronic signatures recognised as a valid way of creating a binding and enforceable agreement?
Under Turkish law, "secure electronic signatures" supported by government-accredited secure electronic signature service providers are deemed valid and binding as wet-ink signatures, unless legal transactions subject to other formal requirements. Franchise agreements, not being subject to any specific formal requirements, may theoretically be executed through "secure electronic signature". The use of secure electronic signature, however, is not still common in Turkey except for certain specific fields. Therefore, signing a franchise agreement electronically is theoretically possible, though it does not seem practical yet.
17.2 If a signed/executed franchise agreement is stored electronically (either having been signed using e-signatures or a "wet ink" version having been scanned and saved as an electronic file), can the paper version of the agreement be destroyed?
A franchise agreement signed/executed by secure electronic signatures can be stored electronically and used as evidence when necessary. Therefore, their paper version may be destroyed.
With regards to "wet ink" version of franchise agreements, the originals should be kept and stored; storing solely their electronic versions should be avoided. Electronic copies of wet-ink documents are not deemed as evidence before the courts particularly if the other party claims that the signatures are fake.
This article first appeared in ICLG