A Guide to Ancillary Franchise Contracts in China: Equipment, Leases and Loans After Termination

When joining a franchise network, you may sign agreements covering brand licensing, equipment purchases, premises rental and borrowing at the same time. One easily overlooked risk is that payments under the other contracts may continue even after the franchise relationship has ended. This guide focuses on ancillary contracts in mainland China’s franchise market, helping you coordinate the agreements before paying rather than having to pursue refunds individually when you leave.

1. Map the contractual relationships: an arrangement made by the franchisor is not necessarily its responsibility

Franchise sales representatives may promise a ‘one-stop shop’ for opening your business, but the brand company, equipment supplier, landlord and lender are often separate entities. Even if they share a contact person or are all recommended by the franchisor, that does not make the franchisor responsible for every refund.

Before signing, prepare a list of the related contracts. For each one, record at least:

• Who signs the contract, who receives payment and who actually supplies the goods or services;
• When payments are due, when performance begins and how much remains unpaid;
• Whether cancellation is permitted, and on what terms and at what cost;
• What happens to the contract if the franchise agreement never takes effect, is terminated or is rescinded.

In particular, check that the account receiving payment belongs to the contracting party. If another company collects payment on its behalf, obtain clear authorisation for that arrangement and specify whose payment obligation is treated as discharged, and who is responsible for any refund.

‘Equipment specified by the franchisor’ describes a purchasing arrangement; that wording alone does not establish that the franchisor is the seller. Likewise, ‘the franchisor will coordinate refunds’ is not a promise by the franchisor to pay. If you need the franchisor to cover a shortfall or assume responsibility, specify the scope of that responsibility, what triggers it and the payment deadline, and have the entity taking on the obligation sign.

2. Understand the legal limits: terminating one contract does not automatically end the others

Mainland China has specific regulations governing franchising. Article 21 of the Regulations on the Administration of Commercial Franchising requires franchisors to provide prescribed information and the contract text in writing at least 30 days before the franchise agreement is signed. The Measures for the Administration of Information Disclosure in Commercial Franchising set out more detailed disclosure requirements. Prospective franchisees should use this period to request the complete set of transaction documents, rather than reviewing only the brand licence agreement.

Article 12 of the Regulations requires the parties to agree on a period after signing during which the franchisee may unilaterally terminate the agreement. However, this right does not automatically allow you to cancel a lease with an independent landlord or release you from your repayment obligations to a lender.

Article 465 of the Civil Code of the People’s Republic of China establishes the general rule that a lawfully concluded contract is legally binding only on its parties. A promise in the franchise agreement that you will ‘incur no further costs after exiting’ will therefore generally be insufficient to bind a supplier or landlord that has not agreed to it.

Equally, the titles of the documents are not decisive. If a brand company splits a single franchise transaction across several contracts, a court may assess the legal relationship as a whole, taking account of the substance of the transaction. That overall assessment is separate from whether each payment is refundable. Refunds will still depend on performance to date, the grounds for termination, the recipient of the money and the specific claims made. It does not follow that ‘all contracts are invalid and all payments must be refunded’.

3. Write coordinated exit arrangements into every ancillary contract

The most effective approach is for each related contract to recognise the conditions on which the franchise project depends, with the relevant counterparty expressly accepting the exit arrangements. Simply attaching ancillary contracts to the franchise agreement is no substitute for the other parties’ consent.

Equipment purchases: distinguish between ordering, custom manufacture, dispatch and installation. You can negotiate that irreversible custom manufacturing will not begin until the franchise agreement has been signed and the requirements for the premises have been met. Specify separate return and deduction rules for standard and bespoke equipment if the project is cancelled. Require cancellation charges to be calculated using agreed criteria and supporting records, rather than accepting a blanket statement that ‘all costs incurred are payable by the franchisee’.

Premises leases: separate access for fit-out works from long-term rent obligations. If the premises can only be used for a particular franchise business, negotiate with the landlord what happens if brand authorisation is not obtained or agreed operating conditions are not met. Specify notice periods, handover of the premises, reinstatement after fit-out works and the final rent settlement. Confirm the landlord’s acceptance before signing; do not rely on oral assurances from the franchisor.

Loan agreements: first establish whether funding can be unwound after disbursement. If the lender pays the brand company directly, check the scope of your authorisation, how receipt of funds will be confirmed, the early repayment terms and the account into which any refund must be paid. A promise by the brand company to refund fees does not mean the loan has been repaid. Do not simply stop repayments before the debt has been legally discharged or an effective alternative arrangement is in place.

The coordinated exit provisions should also distinguish between different reasons for leaving: do the same rules apply if the brand company breaches the agreement, the franchisee chooses to leave or the parties agree to end the relationship? You can ask the parties to sign a multi-party agreement, but it must define each party’s obligations rather than relying on vague wording such as ‘the parties will resolve the matter through consultation’.

4. Test the arrangements with an exit simulation

Before signing, work through three scenarios: before the outlet opens, after equipment has arrived and once the outlet is trading. At each stage, answer four questions: which payments can stop, which contracts require separate notice, which items must be returned and how much debt remains payable?

Record the answers in an exit settlement schedule and obtain written confirmation from the entities responsible for meeting those obligations. Each contract should also specify notice addresses, delivery methods, time limits for action and liability for delays.

If a dispute has already arisen, do not merely send the franchise sales representative a message saying ‘I’m pulling out’. Check the grounds for terminating or cancelling each contract, notify the relevant parties separately and retain evidence of notice delivery, goods delivery, the condition and use of equipment, and payment flows. For a substantial dispute, consider asking a lawyer to coordinate your claims, so that you do not seek to unwind the transaction as a whole while separately confirming that one contract will continue to be performed.

Practical takeaway: Before paying, ask: ‘Who can still charge me after the franchise relationship ends?’ The ancillary contracts are only properly coordinated with your franchise plans when every relevant party has accepted clear exit and settlement rules.