Personal Guarantees and Security in Franchise Agreements in Turkey

Introduction

Franchise agreements frequently impose substantial and continuing financial obligations on the franchisee.

The franchisee may be required to pay an initial franchise fee, continuing royalties, advertising contributions, software charges, product invoices, renovation expenses, contractual penalties and compensation arising from breach or early termination.

Where the franchisee is a newly incorporated company with limited capital and few assets, the franchisor may be unwilling to rely solely on the company’s contractual promise.

The franchisor may therefore require additional security from the franchisee’s shareholders, directors, parent company or another third party.

Common forms of security in Turkish franchise transactions include:

• Personal suretyship;
• Joint and several suretyship;
• Independent personal guarantees;
• Parent-company guarantees;
• Bank letters of guarantee;
• Cash security deposits;
• Mortgages over immovable property;
• Pledges over machinery, inventory or receivables;
• Share pledges;
• Promissory notes;
• Aval on negotiable instruments;
• Assignment of receivables;
• Escrow arrangements.

These security instruments do not produce identical legal consequences.

A suretyship is ordinarily accessory to the principal debt. The surety may rely on certain defences belonging to the principal debtor, and the surety’s liability is subject to strict statutory form requirements.

An independent guarantee may create a primary obligation that is legally separate from the underlying franchise debt. A mortgage gives the creditor priority over the value of a specified immovable property without necessarily making the property owner personally liable for the franchise debt.

A bank letter of guarantee may provide quicker access to payment but may involve substantial bank commissions and counter-security requirements.

The legal classification matters more than the title used by the parties.

Calling a document an “unconditional guarantee,” “joint debtor declaration” or “shareholder commitment” does not necessarily prevent the application of mandatory suretyship protections where a natural person is, in substance, providing personal security for another person’s debt.

Article 603 of the Turkish Code of Obligations expressly extends the provisions concerning the form of suretyship, capacity to become a surety and spousal consent to other agreements made under a different name by natural persons for the purpose of providing personal security. This rule is intended to prevent the protective provisions of suretyship law from being avoided through contractual terminology.

Personal guarantees and security packages should therefore be reviewed as carefully as the franchise agreement itself.

This guide examines the principal personal and proprietary security instruments used in Turkish franchise agreements, their validity requirements, enforcement risks and recommended drafting practices.

Why Do Franchisors Require Additional Security?

A franchisee company may have only limited paid-in capital when the agreement is signed.

Its most valuable assets may consist of equipment, inventory and the right to operate under the franchisor’s brand. Once the franchise agreement ends, the trademark licence and access to the operating system may disappear, significantly reducing the company’s value.

The franchisor may also face difficulty proving or collecting claims involving:

• Unpaid royalties;
• Outstanding product invoices;
• Underreported turnover;
• Contractual penalties;
• Failure to meet development commitments;
• Costs of de-branding;
• Unreturned equipment;
• Misuse of confidential information;
• Consumer claims allocated to the franchisee;
• Damages arising from early termination.

Additional security reduces the risk that the franchisor will obtain a favourable judgment but remain unable to collect the claim.

Security may also encourage contractual compliance because the shareholders know that default may affect their personal assets or pledged property.

However, security should not be unlimited merely because the franchisee is a newly established company.

The amount and form of the security should reflect:

• Expected financial exposure;
• Franchisee investment;
• Contract duration;
• Royalty structure;
• Product credit;
• Number of outlets;
• Development obligations;
• Likely termination costs;
• Other available guarantees.

A security package that covers every present and future obligation without a maximum amount, end date or release mechanism can create substantial enforceability and commercial fairness problems.

Personal Guarantee, Suretyship and Joint Liability

The expression “personal guarantee” is used broadly in commercial practice.

It may refer to several different legal arrangements.

Suretyship

Under Article 581 of the Turkish Code of Obligations, suretyship is a contract under which the surety undertakes personal responsibility toward the creditor for the consequences of the principal debtor’s non-performance. The suretyship depends on an existing and valid principal obligation, although it may also secure future or conditional debts once they arise.

In a franchise structure:

• The franchisee company is the principal debtor;
• The franchisor is the creditor;
• The shareholder, director or third party is the surety.

The surety does not ordinarily become the direct contracting franchisee. Its liability arises because it secures the franchisee’s debt.

Independent Guarantee

An independent guarantee creates a primary obligation of the guarantor rather than an accessory obligation dependent in every respect on the principal debt.

The guarantor may undertake to pay if a specified risk or event occurs, subject to the wording of the guarantee.

The distinction between a suretyship and an independent guarantee depends on the substance of the obligation, including whether the liability is accessory or independent, rather than merely on the heading of the document.

Bank letters of guarantee are generally treated in Turkish legal practice as independent guarantee instruments, particularly where payment is promised on first demand and independently from disputes in the underlying relationship.

Joint and Several Debtor Declaration

A shareholder may be described as jointly and severally liable with the franchisee company.

Genuine joint debt is different from suretyship because each debtor undertakes its own primary debt.

However, where a natural person receives no direct contractual performance and signs only to secure the company’s debt, the court may examine whether the arrangement is, in substance, personal security.

Article 603 makes contractual substance particularly important because the formal protections of suretyship also apply to other personal security arrangements given by natural persons.

The parties should not assume that inserting the words “joint debtor” automatically eliminates suretyship requirements.

Validity Requirements for Personal Suretyship

Turkish law imposes strict form requirements for suretyship.

Failure to satisfy these requirements may make the personal security invalid even where the franchise agreement itself remains fully enforceable against the franchisee company.

Written Form

The suretyship must be made in writing.

An oral promise by a shareholder that it will “stand behind the company” is not sufficient to establish a valid suretyship.

A general signature placed only under the franchise agreement may also be insufficient if the document does not identify clearly that the individual is signing personally as surety.

The signature block should distinguish among:

• Signature on behalf of the franchisee company;
• Signature in personal capacity;
• Signature as surety;
• Signature as guarantor;
• Signature as aval provider.

A person authorised to represent the company should not be treated automatically as personally liable merely because the same person signed the agreement for the company.

Maximum Amount

Article 583 requires the maximum amount for which the surety will be responsible to be stated.

The surety must write the maximum amount personally by hand.

The maximum amount should be expressed clearly in a specified currency.

It should not be replaced by uncertain wording such as:

• All losses suffered by the franchisor;
• All obligations arising during the relationship;
• Every amount that may become payable;
• Unlimited liability.

The amount should be calculated to cover the intended principal debt, interest and recoverable ancillary obligations without becoming impossible to determine.

Date of Suretyship

The date of the suretyship must also be stated, and the surety must write it personally by hand.

The date is important for determining:

• When the suretyship began;
• Which debts are covered;
• Whether the surety was a shareholder or manager;
• Whether spousal consent was required;
• The ten-year statutory duration applicable to guarantees given by natural persons.

Joint and Several Suretyship Wording

Where the surety is intended to be jointly and severally liable, the surety must write by hand that it accepts liability as a joint and several surety or use an expression having the same meaning.

A printed clause signed by the surety is not necessarily sufficient for the handwritten elements required by Article 583.

The maximum amount, suretyship date and joint-and-several status should therefore be completed properly by the surety rather than inserted only through a computer-generated contract.

Special Authority to Give a Suretyship

A person acting through a representative must grant special authority for the representative to provide a suretyship in that person’s name.

Article 583 subjects authority to become a surety and promises to provide suretyship to the same form requirements.

A general power of attorney should not be assumed to authorise the attorney to place the principal under substantial personal guarantee obligations.

Where a franchise transaction is signed through an attorney, the power of attorney should be reviewed specifically for:

• Authority to become a surety;
• Maximum amount;
• Authority to grant a guarantee;
• Authority to mortgage property;
• Authority to pledge shares or movable assets;
• Authority to sign negotiable instruments.

Spousal Consent

As a general rule, a married person may become a surety only with the written consent of the spouse unless a judicial separation decision exists or a statutory right to live separately has arisen.

Consent must be given before or at the latest when the suretyship is established.

Later approval does not ordinarily correct the absence of timely consent.

New consent may also be required for later amendments that:

• Increase the maximum liability;
• Convert ordinary suretyship into joint and several suretyship;
• Materially reduce securities benefiting the surety.

Article 584 contains exceptions for specified commercial guarantees. Spousal consent is not required for suretyships given by the owner of a registered commercial enterprise or by a partner or manager of a commercial company in relation to that enterprise or company. Other statutory exceptions also apply to specified professional and cooperative-credit guarantees.

This exception should not be interpreted without examining the specific facts.

The person should actually hold the relevant ownership, partnership or management status, and the suretyship must relate to the enterprise or company concerned.

A company shareholder giving security for an unrelated person’s debt may remain subject to the spousal-consent requirement.

The Court of Cassation has held in a reported decision that the commercial exception did not apply where the surety was not securing a debt connected with the surety’s own company.

In franchise transactions, the following matters should be verified:

• Marital status of the surety;
• Trade registry status;
• Date on which partnership or management status began;
• Relationship between the guaranteed debt and the company;
• Whether the security is renewed after the person leaves the company;
• Whether the amount or nature of liability is later increased.

Ordinary and Joint and Several Suretyship

The type of suretyship determines when the franchisor may proceed against the surety.

Ordinary Suretyship

In ordinary suretyship, the creditor generally must first pursue the principal debtor.

Direct recourse to the surety becomes available in the statutory circumstances, including cases where enforcement against the debtor has resulted in a definitive certificate of insolvency, Turkish enforcement has become impossible or substantially difficult, the debtor has been declared bankrupt or has been granted a concordat period.

Where the debt is also secured by a pledge existing before or at the time of the suretyship, the ordinary surety may generally request that the pledged asset be realised first, subject to statutory exceptions.

Joint and Several Suretyship

Where joint and several suretyship is validly established, the franchisor may have more direct access to the surety.

Article 586 permits the creditor to proceed against the joint and several surety without first completing proceedings against the principal debtor or realising an immovable mortgage, provided that the principal debtor is in delay following an unsuccessful notice or is manifestly insolvent.

Different rules apply where the debt is secured by a possessory movable pledge or pledge of a receivable.

Franchisors commonly prefer joint and several suretyship.

The individual giving security should understand that this may allow enforcement against personal assets before the franchisee company’s complete insolvency process has concluded.

Scope of the Surety’s Liability

The surety is liable only up to the maximum amount written in the suretyship.

Unless otherwise agreed, Article 589 includes within that maximum:

• The principal debt;
• Legal consequences of the debtor’s fault or default;
• Specified enforcement and litigation costs;
• Limited contractual interest periods.

The surety is generally responsible only for debts arising after the suretyship unless the document expressly provides otherwise.

Article 589 also states that an agreement making the surety responsible for damage caused by invalidity of the principal obligation or for a contractual penalty is definitively invalid.

This provision is particularly important in franchise agreements.

A franchise agreement may impose large contractual penalties for:

• Unauthorized transfer;
• Confidentiality breach;
• Post-termination trademark use;
• Failure to de-brand;
• Breach of a non-compete obligation.

A general suretyship clause should not be assumed to make the surety liable for every contractual penalty.

The franchisor should distinguish carefully among:

• Principal monetary debts;
• Product invoices;
• Royalties;
• Default interest;
• Damages;
• Contractual penalties;
• Restitution obligations.

Attempting to enlarge a surety’s liability through broad wording may conflict with mandatory statutory limits.

Duration and Termination of Natural-Person Suretyships

Suretyship given by a natural person does not continue indefinitely.

Article 598 provides that every suretyship given by a natural person automatically ends ten years after the contract is established.

Even if the document purports to last longer, the surety can ordinarily be pursued only until the ten-year period expires unless the suretyship has been extended or replaced properly.

An extension may be made for a new period of up to ten years, but it must comply with the required form and may be executed no earlier than one year before the existing suretyship ends.

This rule is highly relevant to long franchise relationships.

A franchise agreement may include:

• A ten-year initial term;
• Renewal options;
• Multiple development periods;
• Continuing post-termination claims.

The security documents should therefore specify what happens when:

• The franchise agreement is renewed;
• Royalty rates change;
• Additional outlets are opened;
• New obligations are added;
• The guarantor leaves the company;
• Ten years expire.

Automatic renewal of the franchise agreement does not necessarily renew a natural person’s suretyship validly.

Release of the Guarantor After Share Transfer

A shareholder who sells its shares may assume that the personal guarantee ends when the buyer takes control of the franchisee company.

This assumption is dangerous.

The franchisee company remains the same principal debtor after a share sale. The outgoing shareholder’s suretyship or guarantee may continue unless:

• The security document contains an automatic release;
• The franchisor gives an express written release;
• The security expires;
• A replacement guarantee is accepted;
• The principal debt ends;
• Another statutory termination ground applies.

The share-purchase agreement between the seller and buyer does not necessarily bind the franchisor.

The outgoing shareholder should therefore make release from personal security a closing condition.

A proper transfer process should include:

• Written franchisor consent;
• Replacement guarantees;
• Return or cancellation of promissory notes;
• Release of mortgages or pledges;
• Return of bank guarantees;
• Written confirmation of the outgoing guarantor’s release.

Rights of the Surety After Payment

A surety who pays the franchisor does not necessarily bear the loss permanently.

Under Article 596, the paying surety is subrogated to the creditor’s rights to the extent of payment and may seek recourse from the principal debtor after the principal debt becomes due.

The surety may also benefit from certain pledges and other securities existing at the time of the suretyship or later provided specifically by the principal debtor for the same debt.

The franchisor must preserve securities benefiting the surety.

Article 592 provides that where the creditor reduces existing pledges, priority rights or other security to the surety’s detriment, the surety’s liability may be reduced correspondingly. If the creditor, without justified reason and through gross fault, disposes of relevant documents or securities, the surety may be released.

A franchisor holding several forms of security should therefore manage them consistently.

Releasing a mortgage, returning a bank guarantee or discharging another co-surety may affect the remaining surety’s position.

Independent Personal Guarantees

A franchisor may request that a shareholder sign an independent guarantee rather than a suretyship.

The intended advantage is that the guarantor’s obligation may be treated as primary and independent from disputes under the franchise agreement.

However, Article 603 limits the ability to avoid suretyship protections through another label.

Where a natural person gives personal security for another person’s obligation, the provisions concerning form, capacity and spousal consent also apply even if the document is called a guarantee, indemnity, undertaking or joint liability declaration.

The agreement should therefore be drafted according to its genuine commercial purpose.

The parties should examine:

• Is the obligation accessory to the franchisee’s debt?
• Can the guarantor rely on the franchisee’s defences?
• Does the obligation survive invalidity of the underlying contract?
• Is payment triggered by default or by an independent risk?
• Does the guarantor receive a direct counter-performance?
• Is the guarantor undertaking its own debt?

Where the wording is ambiguous, courts may interpret the obligation in light of the parties’ intention and the protective purpose of suretyship law.

Corporate and Parent-Company Guarantees

An international franchisor may require the Turkish franchisee’s parent company to guarantee the obligations of a special-purpose operating company.

Conversely, a franchisee may request a parent-company guarantee where the contracting franchisor is a newly incorporated subsidiary that does not own the trademark or operational assets.

A corporate guarantee is not subject to handwriting or spousal-consent requirements applicable to natural persons.

However, the following should be reviewed:

• Corporate authority;
• Signatory powers;
• Board or shareholder approvals;
• Articles of association;
• Corporate benefit;
• Maximum amount;
• Currency;
• Duration;
• Governing law;
• Jurisdiction;
• Enforcement location;
• Financial position of the guarantor.

A guarantee from an empty holding company may have little practical value.

The beneficiary should confirm that the guarantor owns sufficient assets and that a Turkish judgment or arbitral award can be enforced where those assets are located.

Bank Letters of Guarantee

A bank letter of guarantee can provide stronger payment security than a shareholder guarantee because the beneficiary relies on the bank’s creditworthiness.

A franchise agreement may require a bank letter covering:

• Several months of royalties;
• Product credit;
• Development obligations;
• Contractual termination payments;
• De-branding expenses;
• Consumer refund exposure.

The letter should define:

• Beneficiary;
• Maximum amount;
• Currency;
• Expiry date;
• Automatic extension;
• Presentation method;
• Required demand wording;
• Whether payment is on first demand;
• Whether documents proving breach are required;
• Governing rules;
• Return and cancellation procedure.

A bank guarantee is generally treated as an independent guarantee instrument in Turkish legal practice, but its actual operation depends on the wording.

An unconditional first-demand guarantee may permit the franchisor to request payment without first proving the complete merits of the underlying franchise claim.

This commercial strength also creates risk for the franchisee.

The franchisee may need to provide the bank with:

• Cash collateral;
• Credit limits;
• Mortgages;
• Shareholder guarantees;
• Other counter-security.

The cost of the guarantee should therefore be included in the investment model.

Cash Security Deposits

A franchise agreement may require a cash deposit held by the franchisor.

The contract should state:

• Deposit amount;
• Currency;
• Holder of the funds;
• Whether interest accrues;
• Permitted deductions;
• Notice before deduction;
• Replenishment obligations;
• Segregation from general funds;
• Return deadline;
• Effect of insolvency;
• Tax treatment.

A deposit should not function as a general fund that the franchisor may use without explanation.

The franchisee should receive an itemised statement for any deduction.

The agreement should distinguish the security deposit from:

• Initial franchise fee;
• Advance royalty;
• Product prepayment;
• Advertising contribution;
• Earnest money;
• Contractual penalty.

If the franchisor may use the deposit for disputed claims, the agreement should include a fair objection and reconciliation mechanism.

Mortgage Over Immovable Property

A franchisee shareholder or third party may mortgage real property to secure franchise obligations.

Under the Turkish Civil Code, an existing claim or a claim that is not yet born but is certain or probable to arise may be secured by mortgage. The mortgaged property does not need to belong to the principal debtor. A third party may therefore mortgage its own property without becoming personally liable for the complete debt unless a separate personal undertaking is also given.

A mortgage is created through registration in the land registry, and the mortgage agreement must satisfy the applicable official-form requirements.

Where the amount of the secured claim is uncertain or variable, an upper-limit mortgage may be used.

The mortgage documentation should identify:

• Secured obligations;
• Maximum amount;
• Currency;
• Rank;
• Property;
• Interest and costs;
• Conditions for release;
• Effect of franchise renewal;
• Effect of transfer;
• Insurance;
• Existing prior mortgages.

When the secured debt ends, the property owner may request cancellation of the mortgage.

A franchisor should not delay release after all secured obligations have been discharged.

Movable Pledges Under Law No. 6750

A franchise business may have significant movable assets but no immovable property.

Law No. 6750 on Pledges in Commercial Transactions provides a framework for non-possessory pledges over commercial movable assets.

The system was designed to expand the range of movable assets that can be used as security, provide publicity through registration and allow the debtor to continue using the pledged assets in its business. The Ministry of Trade describes the system as allowing non-possessory security, registration and alternative enforcement methods.

Depending on the transaction and statutory conditions, security may potentially involve assets such as:

• Machinery;
• Equipment;
• Inventory;
• Receivables;
• Raw materials;
• Intellectual property rights;
• Commercial projects;
• Rental income;
• Business revenues;
• Commercial enterprise assets.

In franchise transactions, a movable pledge may cover restaurant equipment, production machinery, vehicles, stock or receivables.

The parties should verify:

• Whether the asset is eligible;
• Ownership;
• Existing pledges;
• Valuation;
• Registration;
• Priority;
• Insurance;
• Replacement assets;
• Sale or disposal restrictions;
• Enforcement procedure.

Pledging essential operating assets may weaken the franchisee’s ability to continue trading after default. The security should therefore be proportionate to the franchisor’s actual credit exposure.

Share Pledges

The shareholders of the franchisee company may pledge their shares to the franchisor.

A share pledge does not automatically transfer ownership or management control at the time it is created.

However, enforcement may ultimately allow the pledged shares to be sold or transferred.

The agreement should address:

• Shares covered;
• Company type;
• Formal requirements;
• Registration in company records;
• Voting rights before default;
• Dividend rights;
• Additional share issuances;
• Dilution;
• Enforcement;
• Franchisor approval of the purchaser;
• Competition-law and regulatory restrictions.

A share pledge creates a particular structural issue in franchise relationships.

If the franchisor acquires the franchisee’s shares through enforcement, it may become both franchisor and owner of the outlet company.

The franchise agreement and pledge documents should determine whether this is intended and whether another approved buyer may acquire the shares instead.

Promissory Notes and Aval

Franchise agreements sometimes require promissory notes as security for fees or future liabilities.

This method should be used cautiously.

A negotiable instrument may provide procedural advantages to the holder and can generate liability separate from the detailed accounting under the franchise agreement.

The amount, maturity, beneficiary and underlying purpose should be stated clearly.

Blank or incompletely filled instruments create substantial risk.

Aval is a special negotiable-instrument guarantee.

Under Articles 700 to 702 of the Turkish Commercial Code, payment of a bill may be secured wholly or partly through aval. The aval must be written on the instrument or allonge and signed. The aval provider becomes liable in the same manner as the person for whom the aval is given, and the aval may remain valid even where the secured obligation is invalid for a reason other than a formal defect.

Aval is therefore different from ordinary suretyship.

A shareholder asked to place a signature on the face of a promissory note should obtain legal advice concerning whether that signature may be treated as aval and what direct negotiable-instrument liability may result.

Assignment of Receivables

The franchisee may assign receivables as security.

Potential receivables include:

• Credit-card proceeds;
• Marketplace payments;
• Delivery-platform receivables;
• Insurance proceeds;
• Institutional customer invoices;
• Rental income.

The agreement should identify:

• Assigned receivables;
• Existing assignments;
• Notification to the debtor;
• Collection account;
• Trigger for direct collection;
• Surplus proceeds;
• Release conditions;
• Personal data implications.

A blanket assignment of all revenue may deprive the franchisee of working capital immediately after a technical default.

The franchisor should consider whether controlled-account arrangements or limited assignment provide adequate security with less operational disruption.

Security Over Franchise Intellectual Property

The local franchisee ordinarily does not own the franchisor’s trademark or core know-how.

It cannot pledge or assign intellectual property that it does not own.

A security document should distinguish between:

• Franchisor-owned trademarks;
• Franchisee-created local materials;
• Domain names;
• Software licences;
• Local customer databases;
• Social-media accounts;
• Copyright in local advertising content.

The franchisee’s contractual licence normally ends when the franchise agreement terminates and may not be transferable to a secured creditor.

A lender or creditor should not assume that enforcing against the franchisee’s assets will allow continued operation under the brand.

Combining Several Forms of Security

A franchisor may request a security package including:

• Personal suretyship;
• Bank guarantee;
• Mortgage;
• Share pledge;
• Promissory note;
• Cash deposit.

Multiple securities may be justified for a large master franchise or development transaction.

However, the package should not exceed the reasonably foreseeable exposure without a clear release mechanism.

The documents should state:

• Ranking among securities;
• Whether enforcement must follow a particular order;
• Whether one security reduces another;
• Treatment of partial payment;
• Subrogation rights;
• Release after reduction of exposure;
• Effect of additional outlets;
• Effect of renewal;
• Treatment after termination.

Article 592 requires the creditor to preserve securities in a manner that does not prejudice the surety. Releasing or weakening one security may reduce the liability of a remaining surety.

Security administration should therefore be coordinated centrally.

Renewal and Increase of Security

A franchise agreement may require the franchisee to increase security when:

• Turnover increases;
• New outlets open;
• Credit limits rise;
• The guarantor’s financial condition deteriorates;
• A bank guarantee approaches expiry;
• Existing security loses value.

Any increase in a natural person’s suretyship liability must satisfy the applicable form requirements.

An amendment increasing the maximum amount should not be made only through an e-mail, invoice or updated operations manual.

Where spousal consent is required, the amendment should also be reviewed under Article 584.

Security increases should be based on objective criteria rather than unlimited franchisor discretion.

Enforcement and Default Notices

Security should not be enforced automatically after every minor breach.

The franchise agreement and security documents should define:

• Events of default;
• Notice requirements;
• Cure periods;
• Acceleration;
• Amount calculation;
• Demand procedure;
• Disputed claims;
• Enforcement expenses.

Where the parties are merchants, notices relating to default, termination or withdrawal should comply with the methods identified in Article 18 of the Turkish Commercial Code, including notarial notice, registered letter, telegram or registered electronic mail using secure electronic signature.

A demand under a bank guarantee must also comply strictly with the wording and presentation requirements of the letter.

Insolvency and Concordat

Additional security becomes especially important where the franchisee enters insolvency or concordat proceedings.

The franchisor should determine:

• Whether the claim is secured or unsecured;
• Whether the guarantee is independent;
• Whether the surety may be pursued;
• Whether the mortgage or pledge can be realised;
• Whether enforcement is stayed;
• Whether claims must be registered;
• Whether termination rights remain available.

Suretyship law contains special rules concerning bankruptcy, concordat and notification to the surety.

The creditor must protect the claim in the principal debtor’s insolvency proceedings and inform the surety as required. Failure to fulfil statutory duties may result in loss of rights to the extent of the surety’s damage.

Drafting Recommendations for Franchisors

A franchisor should ensure that the security package:

1. Identifies each secured obligation;
2. States a maximum secured amount;
3. Distinguishes royalties, product debts, damages and penalties;
4. Uses the correct legal instrument;
5. Satisfies handwriting and date requirements;
6. Addresses spousal consent;
7. Verifies the guarantor’s corporate or personal capacity;
8. Regulates duration and renewal;
9. Provides replacement-security mechanisms;
10. Coordinates several securities;
11. Preserves the surety’s statutory rights;
12. Includes clear enforcement triggers;
13. Regulates return and release;
14. Avoids holding disproportionate security after exposure declines;
15. Coordinates security with franchise transfer and renewal.

The franchisor should also conduct financial due diligence on the guarantor.

A formally valid guarantee from a person with no assets may provide little practical protection.

Drafting Recommendations for Franchisees and Guarantors

A franchisee or personal guarantor should negotiate:

• A specific maximum amount;
• A defined security period;
• Exclusion of unknown future obligations;
• Exclusion or clear treatment of contractual penalties;
• Reduction as exposure decreases;
• Release following transfer;
• Release after renewal or replacement security;
• Limits on bank guarantee calls;
• Notice and cure periods;
• Return of original instruments;
• Cancellation of mortgages and pledges;
• Restrictions on cumulative enforcement.

The guarantor should request copies of:

• Franchise agreement;
• Amendments;
• Account statements;
• Default notices;
• Security registrations;
• Bank guarantee demands;
• Release documents.

A shareholder should not give an unlimited personal guarantee merely because the operating company has limited capital.

The shareholder’s risk should be calculated as part of the total franchise investment.

Security Checklist for Turkish Franchise Agreements

Before executing a security package, the parties should confirm that:

1. The principal debtor is identified.
2. The secured obligations are defined.
3. The security type is classified correctly.
4. The maximum amount is stated.
5. Natural-person handwriting requirements are satisfied.
6. The security date is written correctly.
7. Joint-and-several status is written by hand where intended.
8. Spousal consent has been assessed.
9. Commercial exceptions to consent are documented.
10. Signatories have valid authority.
11. The guarantor’s assets have been verified.
12. The duration is clear.
13. The ten-year natural-person limit is considered.
14. Franchise renewals do not create an invalid automatic extension.
15. Contractual penalties are treated separately.
16. Bank guarantee demand conditions are clear.
17. Cash deposits have deduction and return procedures.
18. Mortgages satisfy official-form and registration requirements.
19. Movable pledges are registered properly.
20. Share-pledge enforcement is coordinated with franchise approval.
21. Promissory notes are completed fully.
22. Aval liability is understood.
23. Several forms of security are coordinated.
24. Security reductions are linked to reduced exposure.
25. Transfer releases outgoing guarantors expressly.
26. Final payment triggers cancellation and return.
27. Insolvency procedures are addressed.
28. Dispute resolution clauses are consistent.

Conclusion

Personal guarantees and security in franchise agreements in Turkey require a detailed analysis of both the franchise obligations and the legal nature of the security instrument.

A personal suretyship is not merely an additional signature placed under the franchise agreement.

For validity, the maximum amount, date and joint-and-several status must satisfy the strict requirements of Article 583. The required elements must be written personally by the surety.

Spousal consent should also be assessed. Although Turkish law contains an exception for specified guarantees given by business owners, company partners and managers in relation to their own enterprise or company, the exception does not apply automatically to every commercially connected guarantee.

Article 603 prevents the statutory protections from being avoided merely by calling the document an independent guarantee, joint liability declaration or indemnity.

The substance of the undertaking must be examined.

Natural-person suretyships are also limited by a ten-year statutory period. Renewal of the franchise agreement does not automatically extend the suretyship validly.

A franchisor may obtain stronger or more liquid protection through a bank letter of guarantee, cash deposit, mortgage, movable pledge, share pledge or negotiable instrument.

Each method has different creation, priority, enforcement and release requirements.

A mortgage may secure existing or probable future claims and may be provided by a third-party property owner without necessarily creating personal liability.

A commercial movable pledge can allow machinery, inventory and receivables to remain in business use while serving as registered security.

Aval creates negotiable-instrument liability and should not be confused with ordinary suretyship.

The security package should be proportionate.

A franchisor should not retain an unlimited personal guarantee, bank letter, mortgage, share pledge and cash deposit after the relevant exposure has been reduced substantially.

The documents should contain automatic or objective release mechanisms.

The position of outgoing shareholders also requires particular care. A share sale does not automatically release the seller’s personal guarantees. Written release and replacement security should form part of the franchise transfer closing.

The best security arrangement protects the franchisor against genuine credit risk while preserving the franchisee’s ability to operate, finance and ultimately transfer the business.

Frequently Asked Questions

Can a franchisor require a shareholder’s personal guarantee?

Yes. The guarantee must comply with the applicable Turkish suretyship and personal-security rules.

Must a personal suretyship be in writing?

Yes. An oral undertaking is not sufficient.

What must the surety write by hand?

The surety must personally write the maximum amount, the suretyship date and, where applicable, the expression showing acceptance as a joint and several surety.

Can the guarantee be unlimited?

A valid suretyship requires a stated maximum amount. Unlimited wording creates serious validity problems.

Is spousal consent always required?

No. Statutory exceptions apply, including certain guarantees given by registered business owners and company partners or managers in relation to their enterprise or company.

Does the commercial exception apply to an unrelated company debt?

Not automatically. The connection between the guarantor’s own enterprise or company and the secured debt must be examined.

What is the difference between ordinary and joint and several suretyship?

An ordinary surety generally benefits from stronger requirements that the creditor first pursue the principal debtor or security. A joint and several surety may be pursued more directly under the statutory conditions.

Can the surety be liable for contractual penalties?

Article 589 states that an agreement making the surety responsible for the principal debtor’s contractual penalty is definitively invalid. The precise security structure should be reviewed carefully.

How long does a natural-person suretyship last?

It automatically ends ten years after establishment unless it is extended or replaced validly under the statutory procedure.

Does franchise renewal extend the guarantee?

Not automatically. The extension of a natural person’s suretyship must satisfy the applicable statutory form and timing requirements.

Does selling shares release the former shareholder?

No. An express release from the franchisor should be obtained.

What is an independent guarantee?

It is a primary obligation that may operate independently from the principal debt, depending on the wording and legal character of the undertaking.

Can the word “guarantee” avoid suretyship formalities?

No. Article 603 applies the form, capacity and spousal-consent protections to other personal-security agreements made by natural persons.

What is a bank letter of guarantee?

It is generally an independent bank undertaking to pay the beneficiary under the conditions stated in the letter.

Can the franchisor call an unconditional guarantee before winning a lawsuit?

A first-demand guarantee may allow a demand without a final judgment, subject to the exact wording and exceptional legal limitations.

Can a franchise agreement require a cash deposit?

Yes. The agreement should regulate deductions, replenishment, interest, accounting and return.

Can future franchise debts be secured by mortgage?

Yes. Existing and certain or probable future claims may be secured through mortgage.

Can a shareholder mortgage personal property for the company?

Yes. A third-party property owner may mortgage its property, although personal liability requires a separate legal basis.

Can machinery and inventory be pledged without delivery?

The commercial movable-pledge system under Law No. 6750 permits qualifying non-possessory registered pledges.

Can shares of the franchisee company be pledged?

Yes. The documents should address voting rights, enforcement and franchisor approval of any resulting transfer.

What is aval?

Aval is a negotiable-instrument guarantee placed on a bill or allonge. The aval provider is liable similarly to the person for whom the aval is given.

Is aval the same as suretyship?

No. Aval has its own negotiable-instrument rules and may remain valid even where the secured obligation is invalid for reasons other than a formal defect.

Can the franchisor hold several securities at the same time?

Yes. Their ranking, cumulative enforcement and release should be regulated clearly.

Must security be returned when the debt ends?

The relevant security should be released or returned once all secured obligations have ended, subject to any properly documented surviving claim.

What happens if the franchisor releases one security?

Release or reduction of a security may affect the remaining surety’s liability if it prejudices the surety’s statutory subrogation or recourse rights.

Should the guarantor sign the main franchise agreement?

The guarantor may sign a separate security document or a clearly separated section of the main agreement. The personal capacity and applicable formal requirements must be unmistakable.

This article provides general legal information as of July 2026 and does not constitute legal, banking, tax or investment advice. Personal guarantees and security instruments should be reviewed according to the parties, secured debts, guarantor status, marital status, property ownership, company structure and current Turkish legislation.