photo by Gabor Kovacs

We were talking in our weekly team meeting about the fact that our corporation tax payment will be due in January and that, like so many other businesses, we pay corporation tax. “Unlike Starbucks”, someone said.

Graeme then said that at the weekend he had bought a coffee in a Starbucks outlet in a motorway service station. He had been talking to the person behind the counter, who turned out to be the owner of the franchise. This franchisee complained to Graeme that his franchise is a separate business which pays corporation tax like the rest of us. However, he is experiencing a significant downturn in business as consumers boycott Starbucks.

The reasons for consumers avoiding Starbucks are nothing to do with the owners of the individual businesses that make up the chain of Starbucks franchises.  The reasons are everything to do with the main Starbucks business itself, the company that owns the brand and controls the franchise network, receiving substantial franchise payments from the many small businesses that make up the network.  It is well-known that Starbucks has been in the news for paying minimal corporation tax on profits earned in the UK, through arrangements under which it pays licence fees to a non-UK company for the right to use the Starbucks name.  It is fair to note that Starbucks has recently announced that it will voluntarily pay “a significant amount of tax during 2013 and 2014, regardless of whether the company is profitable”.

Although the consumer rebellion may be affecting the main Starbucks company, it seems clear from Graeme’s conversation that the franchisees are sharing the pain, through no fault of their own. Responsibility appears to lie with the franchisor.

This has led us to consider the imbalance to be found in many franchise agreements, which are heavily loaded in favour of the franchisor.  These contain lists of franchisee’s obligations which are invariably much longer than the rather brief lists of  franchisor’s obligations.  I have just looked at a number of franchise agreements, which typically contain an obligation on the franchisee in terms such as:

“not do anything that could or might in the sole opinion of the Franchisor bring the Business into disrepute or damage the reputation of the Business.”

None of the franchise agreements that I have just reviewed contain an obligation on the franchisor “not to bring the Business into disrepute or damage the reputation of the Business.”

Surely it is the strength of the brand that underpins the success of individual franchise businesses, whether these be selling coffee or burgers or high-end Scandinavian hi-fi.  If the brand is tarnished, then the sales performance of the individual franchises will suffer. It is not just the owner of the brand that is affected, but also the numerous franchisees who have invested a great deal of money in the strong performance of the brand.

So why does the owner of the brand not make a promise to its franchisees not to bring the brand into disrepute or do anything to damage its reputation?  Why does it not even promise that in the event of damage to the reputation of the brand it will immediately use best endeavours to minimise the damage?

We have been discussing amongst ourselves whether an obligation on the franchisor not to bring the brand into disrepute can be implied into franchise agreements (and here starts some legal discussion).  The circumstances in which a Court will imply a term into a commercial contract have been developed in a number of cases over very many years.  The most recent major decision was in 2009, in a Privy Council case Attorney General of Belize and others v Belize Telecom Ltd [2009] UKPC 10.

In that case, Lord Hoffmann said that the question of implication arises when a contract does not expressly provide for what is to happen when some event occurs. The usual inference is that nothing is to happen: if the parties had intended something to happen, the contract would have said so. Accordingly, the express provisions of the contract should continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.

In some cases, however, Lord Hoffmann continued, a reasonable person would understand the contract to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The contract may not have expressly said so, but this is what it must mean. In such a case, the court will imply a term as to what will happen if the event in question occurs.

Lord Hoffmann concluded that It followed that in every case in which it is said that some provision ought to be implied in a contract, the question for the court is whether such a provision would spell out in express words what the contract, read against the relevant background, would reasonably be understood to mean. The courts have formulated this question in various ways (for example that the implied term must “go without saying”, or that it must be “necessary to give business efficacy to the contract”), but these formulations should not be treated as different or additional tests.

So the main principles are that a court may imply a term into a specific contract to fill a gap in the contract’s drafting. The purpose would be to reflect the parties’ intentions when the contract was entered into.   Applying an objective test, the court will consider what a reasonable person would have understood the parties’ intentions to be, given the background knowledge reasonably available to the parties at the time they entered the contract. The courts will not imply a term into a contract simply because they think it would have been reasonable for the parties to have included such a term in the contract.

You and I may think it necessary, indeed essential, that a franchise agreement should include an obligation on the part of the franchisor not to bring the brand into distribute or do anything to damage the reputation of the brand.   We may think that this goes without saying, and that such an obligation should be implied into franchise agreements.  However, any franchisee or group of franchisees that tries to claim damages in court proceedings will be embarking on major and strongly contested litigation as it tries to persuade a Court of the need to imply such a term into their franchise agreement.  And, who has the bigger financial muscle for such a fight, the owners of the small businesses or the multi-national brand owner?

And with those thoughts, it’s time for a Fair Trade flat white …

For this post, we have a guest blogger, John Plumridge of Curtis Plumstone Associates


Currently, as I write this blog in March 2012 many people involved in commercial property may well be unaware of the changes which are going to take effect in April 2012.  The purpose of writing this particular blog is therefore to try and enlighten them as to these changes and the pitfalls, which may well include being sued, if they do not accept that they are to play a central role in advising their clients in respect of capital allowances claims on commercial property.

What’s happening post April 2012 if there has been no previous claim?

If a company or individual is selling a commercial property purchased before April 2012 then not a lot will change. The buyer’s solicitor still needs to ensure they receive properly completed section 19 of the CPSE1 form to establish the capital allowances claims history of the property being sold. If it appears there have been no previous capital allowances claims on the property then a Section 198 Election Agreement for plant and machinery fixtures is not possible and the right to claim capital allowances on the property will transfer to the buyer just as it does now. In summary the buyer is normally in the stronger position as the underlying law favours them.

However a pro-active solicitor may advise the seller of his right to make a capital allowances claim within, broadly, up to a couple of years of the sale allowing them to enter into a Section 198 Election Agreement with the buyer where the capital allowances are agreed to be valued at £1. In reality we see this happen very infrequently at the moment because most conveyancing solicitors do not see it as their role to advise their clients on the benefits of making a capital allowances claim whether representing the seller or the buyer.

What’s happening post April 2012 if there has been a claim?

Where a capital allowances claim has been previously made then a Section 198 Election Agreement may be entered into between the parties agreeing how the capital allowances are distributed between seller and buyer. The seller’s solicitor will normally be trying to value the capital allowances at £1 whilst the buyer’s solicitor should be trying to get them valued at the original valuation when the capital allowances were first pooled (i.e. claimed) by the seller’s accountant.

If agreement cannot be reached between the parties then the buyer has up to a maximum of two years from the date of completion to  refer the matter to the tax chamber of the First-tier Tribunal for determination.  As the underlying law indicates the full benefit of the capital allowances should generally pass to the buyer on completion then sellers would be advised to come to an agreement before this happens or risk facing the time and trouble of dealing with a tribunal and losing all rights to the capital allowances previously claimed. If  a Section 198 Election Agreement is not entered into or a decision not sought from the First-tier Tribunal in time then any future rights to claim capital allowances on the original plant and machinery purchased as part of the sale will be lost not only to the current buyer but any future buyer too.  Potentially devalued because any new purchaser is deprived of making a capital allowances claim at all!

What’s happening post April 2014 if there has been a claim?

Post April 2014 is where there is going to be a major sea change.  Where there has been a previous claim then a Section 198 Election Agreement still may be agreed between the parties. If they cannot agree then the buyer once again can refer the matter to The First-tier Tribunal. If agreement cannot be established then again any future right to claim capital allowances will be lost to the buyer and future purchasers.

What’s happening post April 2014 if there has not been a claim?

Where it is established that the seller could have claimed capital allowances but did not do so then it is imperative on the seller to pool the capital allowances before sale (i.e. formally notify the qualifying expenditure to HMRC in a tax return). This means the seller will need to have the required surveys completed by a specialist, pool the capital allowances into their tax accounts and then enter into a Section 198 Agreement to distribute the capital allowances as agreed. This really needs be agreed as part of the negotiations on sale of the property.

However, what if the above is missed as part of the property sale and purchase? The new owner will not have the right to take it to  the First-tier Tribunal (because the seller must first have claimed) and if they want to get the benefit of any capital allowances they will have to persuade the seller, after the event, to allow a capital allowance claim to be made. The seller will then have to agree for the capital allowances to be pooled into their tax accounts and then enter into a retrospective Section 198 Election Agreement for the capital allowances to be transferred to the new owner.  The problem is, will the original seller be motivated to do this having completed on the sale?  I would suggest there will have to be some financial motivation provided by the new owner to persuade them to do this and even then they might not get the original seller’s agreement. Again if agreement is not reached future rights to claim capital allowances will be lost to all future buyers.

This last scenario shows the potential for those who do not have access to the correct professional advice losing the right to  claim Capital allowances altogether.

John Plumridge BA(Hons) MCIPS


Many thanks to John for writing this guest blog.  You can find out more by contacting John via or by e-mail:  We will be happy to arrange a meeting: please contact Graeme Quar if you would like us to set up a meeting.