Pre-contract Franchise Payments in China: Agreeing Their Purpose and Refund Terms

When exploring franchise opportunities in China, you may be asked to pay an ‘expression-of-interest fee’, a ‘city territory reservation fee’ or a ‘project visit fee’ before discussions can proceed. The key questions are not how much you are paying, but what the payment secures, when it can be refunded, and whether paying already amounts to accepting a franchise arrangement. This guide focuses on charges made before the formal contract is signed, not performance security deposits payable once the business is operating.

1. Understand the legal requirements: payment is not simply registration

China has specific regulations governing commercial franchising. Article 16 of the Regulations on the Administration of Commercial Franchising requires a franchisor that asks a prospective franchisee to pay a fee before entering into a franchise contract to explain, in writing, the purpose of that fee and the conditions and procedure for refunding it. ‘Pay first and we will discuss the rest later’ is therefore not an appropriate arrangement.

The Measures for the Administration of Information Disclosure in Commercial Franchising also include the purpose of pre-contract fees, their refund conditions and the refund procedure among the information that must be disclosed. A salesperson’s assurance that ‘you can definitely get it back’ is no substitute for a clear written explanation.

The Regulations on the Administration of Commercial Franchising also require the franchisor to provide the prescribed information and the contract text in writing at least 30 days before the franchise contract is concluded. Paying an expression-of-interest fee does not replace information disclosure, nor does it mean you have completed your due diligence on the brand.

These rules do not, however, mean that every pre-contract fee must be refunded in full and without conditions. Refund entitlement still depends on the agreed terms, how the money was actually used, each party’s performance of its obligations and the applicable law. The safest approach is to put the conditions in writing before paying, rather than argue over sales promises after a problem arises.

2. Turn a ‘reserved place’ into specific, verifiable rights

Before paying, ask the franchisor to answer three questions: who receives the money, what will it be used for, and what do you receive in return?

The recipient should be identified by its full company name, with an explanation of its relationship to the proposed franchisor. If you are asked to pay a sales representative personally or a third party, first obtain verifiable authorisation to collect the payment, an explanation of which entity the fee belongs to, and clear arrangements for responsibility for refunds. Without these documents, you should not proceed with the transfer. The payment reference and receipt should also use the same fee description as the agreement.

For a ‘city territory reservation’, specify:

• The area, outlet format and period covered by the reservation;
• Whether the franchisor may continue accepting other applications or granting the same rights during that period;
• Whether you remain free to decide not to sign the formal contract;
• How the money will be refunded, and what liability the franchisor will bear, if it cannot honour the reservation.

If the fee covers arranging visits, assessing an application or providing advice, list the specific services, deliverables and completion criteria. Do not accept vague descriptions such as ‘preliminary work’, which are difficult to verify or cost.

In particular, distinguish between a payment that will be credited towards the franchise fee and an additional charge. Specify how the credit will be applied after signing, which fee it will offset, and whether any other similar payments will be due, so that you do not pay twice for the same service.

3. Cover the different reasons why a contract might not be signed

‘If the parties do not sign a contract, the matter will be resolved through negotiation’ may sound flexible, but it postpones the most important question until a dispute has already arisen. It is better to agree separate terms for different reasons the deal might fall through, rather than simply stating ‘non-refundable’.

The franchisor rejects the application. If head office does not approve your application after payment, the agreement should state whether you will receive a full refund, who will communicate the decision and the deadline for making it. This helps prevent your money from being tied up indefinitely.

Due diligence reveals material discrepancies. You can agree that you may end discussions and request a refund if the franchisor fails to provide key documents within the agreed period, or if there are material differences between its written statements and the actual business resources, fee terms or other relevant matters. Ideally, list the key documents in an appendix.

The parties cannot agree on the formal contract. Make clear that the preliminary agreement does not mean you have accepted contract terms that have not yet been provided or negotiated. Agree what happens to the fee if no agreement is reached by the negotiation deadline.

The applicant changes their plans. If you agree that the franchisor may deduct service costs already incurred, specify the scope of those services, the calculation method, the supporting evidence required and a cap on deductions. This helps prevent the franchisor from later treating the entire payment as ‘franchise recruitment costs’. These are suggested terms to negotiate, not uniform refund standards imposed by law.

Finally, set out the practical procedure: who should receive the refund notice, which methods of notification are permitted, how many working days the recipient has to issue the refund after receiving notice, and which account the money should be returned to. A refund should not depend on an event outside your control, such as ‘finding the next franchisee’.

4. Check whether you are already committing to sign a contract

Calling a document a ‘letter of intent’ does not necessarily make it non-binding. China’s Civil Code contains provisions on preliminary contracts: if the parties agree to enter into a contract within a specified future period, failure to fulfil that commitment may give rise to liability for breach. Check particularly carefully for wording such as ‘must sign the contract’, ‘failure to sign constitutes a breach’, or provisions imposing substantial payments for breach.

If the document already includes core arrangements such as authorisation to use business resources, a standardised operating model and fees, its legal nature must also be assessed by reference to the actual rights and obligations it creates. Its title alone does not establish that it is merely a registration form.

An ‘expression-of-interest payment’ is not automatically the same as a deposit with a legally defined security function, known in Chinese as dingjin (定金). If the document expressly provides for such a deposit, review it against the Civil Code’s deposit rules rather than relying on the label used by the salesperson. Pre-drafted terms such as ‘non-refundable under any circumstances’ also warrant scrutiny: consider whether they were adequately brought to your attention and explained, and whether they are legally effective. Do not assume that signing prevents you from challenging them.

When paying, keep the complete agreement, the explanation of the fee’s purpose, refund commitments, proof of transfer and original communication records. If a dispute arises, promptly set out your specific requests in writing. A franchisor’s failure to explain pre-contract charges as required by law does not automatically settle every question about refunds and compensation.

Practical takeaway: obtain written explanations of the charges and refund terms before deciding whether to pay. If the payment recipient is unclear, the reservation rights are vague, or there is no answer on refunds if the contract is not signed, pausing payment is usually safer than trying to recover the money later.