Choosing Franchise Premises in China: Clarify Lease Terms, Licensing and Liability if You Cannot Open

When joining a franchise network, entrepreneurs often focus first on footfall and rent, overlooking a more basic question: can the proposed business legally operate from these premises? Approval of a site by the franchisor, a landlord’s agreement to let it and permission from the relevant authorities to trade are three different things. Treating them as a single guarantee can leave you with franchise fees paid, rent accruing and a completed fit-out — but no way to open.

1. Distinguish franchisor approval from permission to open

A franchisor’s site assessment usually focuses on the catchment area, floor space, brand presentation and operating model. It is no substitute for checking the property’s permitted use, fire safety conditions or licensing requirements. Advice from other franchisees can help you shortlist premises, but cannot replace checks on the specific address.

Article 11 of China’s Regulations on the Administration of Commercial Franchising requires franchise agreements to cover matters including fees, operational guidance, product or service quality requirements, termination and liability for breach. However, the regulations do not say that a franchisor automatically bears all losses arising from a failure to obtain licences simply because it approved the site. A statement such as “this location will work” should therefore not be taken as a guarantee that you can open.

Before signing, ask the franchisor to answer the following clearly:

• Does its assessment cover commercial viability only, or technical conditions as well?
• Who checks the requirements for electricity, water supply, drainage, extraction and equipment installation?
• Who prepares the licence applications, and who pays for remedial work?
• What conditions underpin the approval, and which matters remain unconfirmed?

Request a written assessment for the specific premises, with floor plans, technical requirements and a list of outstanding issues. A franchise sales representative’s verbal promise to “take care of all the licences” is no substitute for a clear allocation of duties, nor can it bind the approving authorities.

2. Check suitability before paying a deposit

Start by asking the landlord for evidence of ownership and authority to let the premises. If the arrangement involves a sublease, check the head lease, the right to sublet and the remaining term. Whether the address can be used to register the business for a business licence and whether the outlet can obtain its required operating licences are separate questions that need separate confirmation.

A site inspection should go beyond checking whether the empty unit looks tidy. Food businesses, in particular, should examine extraction routes, wastewater drainage, grease traps, electrical capacity and building management restrictions. Other types of outlet should also check permitted use and essential conditions against their actual business activities. A landlord saying “the previous tenant did the same thing” does not mean a new operator can open on the same basis.

For example, China’s Measures for the Administration of Food Business Licensing and Filing distinguish between activities requiring a food business licence and those, such as selling only pre-packaged food, that require a filing instead. A procedure suitable for selling pre-packaged food cannot replace the licensing checks needed for preparing and serving food on site. Confirm the specific requirements individually with the local market regulation authority, housing and urban–rural development authorities, other relevant bodies and building management.

Prepare a premises checklist with columns for “requirement, current condition, confirming party, remedial cost and completion date”. Where a formal approval decision cannot be obtained in advance, record the scope of any enquiries and the remaining uncertainties. Do not treat an informal response as an approval document.

If there are serious doubts about extraction, permitted use or fire safety conditions, pause irreversible expenditure. A rent discount will rarely compensate for the risk of being unable to open.

3. Align the conditions in the franchise agreement and lease

The most dangerous arrangement is one in which both contracts require payment but provide no coordinated exit mechanism: the franchisor says securing premises is the franchisee’s responsibility, while the landlord says the success or failure of the franchise has nothing to do with the lease.

China’s Civil Code allows parties to make civil legal acts subject to conditions, where permitted by law. In negotiations, a lawyer can help structure conditions for the agreements to take effect, staged payments or specific termination grounds to suit the transaction. There is no need to insist that the entire contract remain ineffective until all approvals have been obtained.

Focus on aligning the following:

• Address: The franchise agreement should identify the proposed premises or set out a procedure for confirming the final address. The lease should clearly state the permitted business use.
• Timetable: Schedule handover, site approval, technical checks, fit-out and licence applications so that the franchise opening deadline allows a reasonable preparation period.
• Payments: Link substantial payments to verifiable milestones, distinguishing between reservation payments, franchise fees, security deposits and charges for services already provided.
• Exit rights: Specify who may terminate if listed site conditions cannot meet the requirements within an agreed period, how notice must be given, and how payments and the premises will be returned.

These arrangements need to be agreed separately with both the franchisor and the landlord. A franchise clause stating that fees are refundable if licences cannot be obtained does not automatically remove your obligation to pay rent under the lease. Equally, a right to end the lease does not automatically entitle you to a refund of franchise fees.

Also check compliance with Article 21 of the Regulations on the Administration of Commercial Franchising, which requires written information disclosure and a sample contract to be provided at least 30 days before signing. Do not let pressure that “someone else will take the premises” cut short the necessary review period.

4. Allocate responsibility according to why opening is prevented

A contract should do more than state that “the franchisee is solely responsible for obtaining licences”. A more practical approach is to allocate responsibility by cause, rather than make a blanket promise that the outlet will open successfully.

If the obstacle arises because the landlord failed to disclose the property’s true condition, the lease should specify the resulting liability. If the franchisor’s design fails to meet requirements it undertook to check, the franchise agreement should address revisions, reassessment and responsibility for reasonable losses. If the franchisee changes the construction plans without authorisation or fails to submit documents on time, it should bear the corresponding consequences. For approval obstacles where no party is at fault, set out a clear termination and cost-sharing mechanism.

Settlement clauses should answer at least four questions: are fees for services not provided refundable; how will completed work be valued; can equipment be returned or relocated; and who pays for removing the fit-out and reinstating the premises? Require the franchisor to support any deductions with evidence such as contracts, invoices or records of services performed, rather than relying solely on its own internal price quotations.

If an obstacle to opening arises, notify the relevant parties promptly in writing, retain any instructions for remedial work and limit further losses. Do not keep increasing fit-out expenditure while responsibility remains unclear. Nor should you assume that stopping work entitles you to stop all payments. If termination or a claim for compensation is being considered, consult a lawyer qualified to practise in China, taking the contracts and evidence into account.

Practical reminder: Check the premises first, align the two contracts next, and then pay against agreed milestones. Only by spelling out what happens if you cannot open can you avoid treating site approval as a green light with no clear allocation of responsibility.