Who Owns the Fixtures in a Franchise? Franchise Agreement Inclusions and Ownership in the Philippines

Introduction

Franchising has become a prominent business model in the Philippines, allowing entrepreneurs to operate under established brands while leveraging proven systems. However, questions of ownership, particularly regarding fixtures—such as built-in shelving, counters, lighting, and other semi-permanent installations in a franchised outlet—often arise. These issues are critical because fixtures represent significant investments and can impact the rights of both franchisors (the brand owners) and franchisees (the operators) during the franchise term and upon its expiration or termination.

In the Philippine context, there is no dedicated franchise law akin to those in other jurisdictions, such as the U.S. Franchise Rule. Instead, franchising is governed by general principles of contract law under the Civil Code of the Philippines (Republic Act No. 386), intellectual property laws under the Intellectual Property Code (Republic Act No. 8293), and relevant provisions of the Corporation Code (Batas Pambansa Blg. 68) for corporate franchises. The franchise agreement serves as the primary document dictating rights and obligations, including ownership of fixtures. This article explores the legal framework, typical agreement inclusions, ownership dynamics, and potential disputes surrounding fixtures in Philippine franchises, drawing on established civil law principles and common franchising practices.

Definition of Fixtures under Philippine Law

To understand ownership, it is essential to define "fixtures" in the Philippine legal context. The Civil Code classifies property as either movable (personal) or immovable (real). Fixtures typically fall under immovable property when they are attached to land or buildings in a way that makes them integral to the structure.

Article 415 of the Civil Code outlines immovable property, including:
- Buildings, roads, and constructions adhered to the soil.
- Machinery, receptacles, instruments, or implements intended by the owner of the tenement for an industry or works carried on therein, which tend directly to meet the needs of said industry or works.

In a franchise setting, fixtures might include point-of-sale counters, display racks, kitchen equipment in food franchises, or branded signage in retail outlets. These are often "trade fixtures," installed specifically for business purposes. Unlike permanent accessions (e.g., a built-in wall that cannot be removed without damage), trade fixtures are generally considered removable by the installer, provided removal does not impair the property.

Philippine jurisprudence, such as in Davao Sawmill Co. v. Castillo (G.R. No. L-40411, 1935), distinguishes trade fixtures as movable property when installed by a tenant (or franchisee) for their trade, even if attached to the premises. This principle aligns with Article 416, which classifies as movable property items like machinery or utensils destined for use in a business, unless the owner has placed them permanently.

In franchises, the distinction is crucial: if the franchisee leases the premises, fixtures may be governed by lease laws (e.g., under the Rent Control Act or general lease provisions in the Civil Code), allowing removal at lease end. If the franchisee owns the property, fixtures become part of their real property unless specified otherwise.

Ownership Principles in Franchise Relationships

Ownership of fixtures in a franchise is not automatically vested in one party but is determined by:

The Party Responsible for Installation and Cost: Generally, the franchisee bears the cost of outfitting the location, including fixtures, as part of their initial investment. Under basic property law (Article 440 of the Civil Code), "the ownership of property gives the right by accession to everything which is produced thereby, or which is incorporated or attached thereto." Thus, if the franchisee installs and funds the fixtures, they own them, subject to agreement terms.
Franchisor's Interest in Brand Protection: Franchisors retain control over fixtures to ensure uniformity and protect intellectual property. For instance, branded fixtures (e.g., signs bearing trademarks) may involve licensing rather than outright ownership transfer. The Intellectual Property Code protects trademarks, and misuse post-franchise could lead to infringement claims.
Lease vs. Ownership of Premises: Many franchises operate on leased spaces. In such cases:
- Article 1678 allows tenants to remove improvements (including trade fixtures) at lease end if removable without damage.
- However, if fixtures are supplied by the franchisor (e.g., proprietary equipment), ownership may remain with the franchisor, with the franchisee granted a right of use.
Accession and Good Faith: If fixtures are attached to immovable property owned by one party, principles of accession apply (Articles 445–466). A good-faith builder (e.g., franchisee installing on franchisor-owned land) may retain ownership or seek reimbursement, while bad-faith actions could lead to forfeiture.

In practice, franchisees own most fixtures as their capital contribution, but franchisors may claim rights over specialized or branded items to prevent competition post-termination.

Key Provisions in Franchise Agreements Regarding Fixtures

The franchise agreement is the cornerstone, often a detailed contract spanning operations, fees, and assets. Common inclusions related to fixtures include:

Site Development and Build-Out Specifications:
- Agreements mandate that franchisees construct or renovate the outlet according to franchisor-approved plans, including fixture layouts. This ensures brand consistency (e.g., uniform store designs in fast-food chains like Jollibee or retail franchises like 7-Eleven).
- Franchisees typically procure fixtures from approved suppliers, with costs borne by them. Ownership vests in the franchisee, but the agreement may require maintenance to franchisor standards.
Ownership Clauses:
- Explicit statements on ownership: "All fixtures, equipment, and improvements installed by the Franchisee shall remain the property of the Franchisee, subject to the terms herein."
- Exceptions for franchisor-supplied items: Proprietary fixtures (e.g., custom machinery) may be leased or licensed, with ownership retained by the franchisor.
Intellectual Property Integration:
- Fixtures incorporating trademarks (e.g., logos on counters) are subject to IP licensing. The agreement prohibits removal or alteration without consent and requires de-identification upon termination.
Financing and Security Interests:
- If the franchisor finances fixtures, they may retain a security interest under the Personal Property Security Act (Republic Act No. 11057), allowing repossession on default.
- Royalty fees or initial franchise fees sometimes cover design rights but not physical ownership.
Maintenance and Upgrades:
- Franchisees must maintain fixtures, with periodic upgrades required. Failure can lead to default, potentially affecting ownership rights.

These provisions are enforceable under Article 1305 of the Civil Code, as long as they are not contrary to law, morals, or public policy. Courts scrutinize agreements for unconscionability, especially if they favor the franchisor excessively.

Termination and Post-Termination Rights

Termination—whether by expiration, mutual agreement, or breach—often triggers fixture disputes:

De-Branding Requirements:
- Agreements require franchisees to remove branded fixtures (e.g., signs, decals) immediately upon termination to avoid trademark dilution. Ownership of non-branded fixtures remains with the franchisee.
Buy-Back or Transfer Options:
- Some agreements grant franchisors a right of first refusal to purchase fixtures at fair market value or book value. This prevents franchisees from repurposing the site for competing businesses.
- In cases of franchisee default, franchisors may seize fixtures as collateral.
Removal Rights:
- Drawing from lease principles, franchisees can remove trade fixtures if the premises are leased, per Article 1678. If owned, fixtures stay unless severed.
- Delays in removal could lead to abandonment, vesting ownership in the landlord or franchisor.
Non-Compete Clauses:
- Post-termination, non-compete provisions (enforceable if reasonable under jurisprudence like Rivera v. Solidbank Corp., G.R. No. 163269, 2006) may restrict fixture use in similar businesses, indirectly affecting ownership value.

Disputes may involve claims for unjust enrichment (Article 22) if one party benefits from the other's improvements without compensation.

Legal Considerations and Disputes

Several legal angles influence fixture ownership:

Tax Implications: Fixtures are depreciable assets for the owner under the Tax Code (Republic Act No. 8424, as amended). Franchisees can claim deductions, but misattribution of ownership could lead to audits.
Corporate and Regulatory Compliance: For corporate franchises, the Corporation Code requires asset disclosures. Foreign franchisors must comply with the Foreign Investments Act (Republic Act No. 7042) if owning fixtures locally.
Dispute Resolution: Agreements often mandate arbitration under the Alternative Dispute Resolution Act (Republic Act No. 9285). Courts apply contract interpretation principles (Article 1370), favoring clear terms.
Common Disputes:
- Franchisee claims franchisor overreaches on branded fixtures.
- Franchisor alleges improper removal causing damage.
- Valuation disagreements in buy-backs.

Jurisprudence emphasizes pacta sunt servanda (agreements must be kept), but voids oppressive clauses.

Conclusion

In Philippine franchises, fixture ownership primarily resides with the franchisee as the installer and funder, tempered by franchise agreement provisions that protect the franchisor's brand and system. Absent specific legislation, reliance on the Civil Code and contract law underscores the importance of clear, balanced agreements. Prospective franchisees should seek legal review to negotiate favorable terms, ensuring fixtures' value is preserved. Ultimately, while fixtures enhance operational efficiency, their ownership reflects the broader power dynamics in franchising, demanding vigilance to avoid post-relationship conflicts.

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