Designing Franchise Contract Terms and Renewal Reviews in China

When developing an existing business into a franchise network, companies often set the franchise fee first and fill in the contract term afterwards. Yet fitting out an outlet, investing in equipment and training a team all take time. A term that is too short, or unclear renewal conditions, can leave both parties in a difficult position towards the end of the relationship. Before recruiting their first franchisees, franchisors should decide how long the relationship will last, when it will be reviewed and what conditions will govern renewal, rather than waiting until the first contracts expire.

1. Distinguish legal requirements from commercial choices

Commercial franchising in mainland China is governed by the Regulations on the Administration of Commercial Franchising. Article 11 requires the parties to enter into a written franchise contract covering, among other matters, the scope and duration of the franchise. Article 13 provides that the agreed franchise term must be at least three years, unless the franchisee agrees otherwise. This provision does not apply to renewals of franchise contracts.

Three years is therefore not an inflexible term that applies to every contract, nor does completing three years automatically give a franchisee a right to renew. Franchisors should explain separately the initial contract term, any arrangement for a term shorter than three years, and the conditions governing renewal on expiry.

If a shorter initial term is proposed, a verbal explanation from the franchise recruitment team that the parties will simply ‘try it out first’ is not enough. It is advisable to state the actual start and end dates, the period covered by the fees and what will happen on expiry, and to retain a written record of the franchisee’s agreement to that term. Written confirmation is a management safeguard, not a means of excluding other statutory obligations.

The signing date, effective date, start of the franchise authorisation and expected opening date should also be distinguished. If the contract term runs from signing but preparations for opening take a long time, the franchisee’s actual trading period will be shorter. The contract should explain how delays in preparation will be handled, when an extension may be granted and who must approve it, rather than leaving the parties to reconstruct dates afterwards.

2. Check feasibility with a schedule of relevant terms

Before deciding the contract length, the franchisor should ask its operations, finance and legal teams to prepare a schedule comparing the relevant terms. At a minimum, this should cover the franchise authorisation, premises lease, trademark licence the franchisor can grant to the outlet, key system services and arrangements for using major equipment. Each entry should identify its start and end dates, renewal conditions and the person responsible.

The aim is not to make every date identical, but to check that the resources needed to support the promised operating period will remain available. For example, if the franchisor’s own brand licence expires before the proposed franchise contract ends, it should resolve the issue of continued licensing first. An expectation that a licence can be renewed should not be presented to a franchisee as a firm commitment.

Actual investment records from company-operated pilot outlets should also be used to test whether the term is reasonable: which costs are one-off, which investments can be redeployed and which expenditure will continue to arise late in the contract term. Internal modelling can test resilience to delayed opening or sales below plan, but it must not be turned into a promise that the franchisee will recoup their investment.

If the franchisor intends to require new equipment or refurbishment towards the end of the contract, it should also assess whether the remaining trading period gives the franchisee an adequate basis for an informed decision. The issue is whether the term and investment requirements are compatible; simply extending the contract is no substitute for explaining the costs.

3. Turn renewal conditions into verifiable rules

A renewal clause should not merely say ‘subject to the franchisor’s approval’. When signing the initial contract, franchisees should know how to apply, what documents are required, what will be assessed, how the decision will be made and whether fees or the form of contract may change on renewal.

Consider dividing the assessment criteria into three categories:

• Basic eligibility: the operating entity and necessary licences remain valid, the outlet can continue trading lawfully, and the relevant business resources can remain licensed for use.
• Contractual performance: whether there are unresolved material breaches, outstanding payments or recurring quality issues that have not been remedied.
• Readiness for continued operation: whether key personnel, equipment and systems can meet reasonable requirements for the next contract term.

Each criterion should be linked to evidence and identify the department responsible for verification. Where issues can be remedied, set out a corrective action and reassessment process. Where continued cooperation is not possible, explain the basis for that conclusion. Avoid introducing new thresholds shortly before expiry that the franchisee could not previously have anticipated.

Renewal does not mean that the original prices and conditions continue indefinitely. If fees, support or the scope of authorisation may change for the next term, the contract should set out a process for presenting proposals and reaching agreement. Automatic renewal provisions should clearly specify the triggers, notification methods and non-renewal procedure, so that the parties do not interpret silence differently.

4. Work backwards from expiry to avoid uncertainty

Franchisors can set an internal renewal timetable suited to the complexity of their outlets, progressing through expiry reminders, confirmation of renewal intentions, document checks, corrective action reviews, negotiation of terms and written signing. These milestones are internal management arrangements and should not be presented as universally applicable statutory deadlines.

The timetable should give franchisees time to consider new terms and plan their operations, while also allowing both parties time to make arrangements if they cannot reach agreement. It is advisable to appoint one process owner to consolidate input from operations, finance and legal teams. This helps avoid a situation in which recruitment staff promise renewal while other departments prepare for termination on expiry.

Pay particular attention to situations where the contract has expired but the franchisee can still use the systems and the franchisor continues supplying goods and collecting fees. Do not rely on this state of affairs as a substitute for an explicit agreement. If a transition period is genuinely needed, have the legal team review a written arrangement before expiry, specifying its duration, scope of authorisation, fees and each party’s responsibilities.

Once renewal is complete, update the contract register. Article 9 of the Measures for the Administration of Commercial Franchise Filing requires franchisors to report to the filing authority, by 31 March each year, on franchise contracts entered into, rescinded, terminated or renewed during the preceding year. Renewal records therefore support both day-to-day management and compliance with reporting obligations.

Practical takeaway: before recruiting the first franchisees, prepare a schedule of relevant terms, a renewal criteria checklist and a timetable working backwards from expiry, then incorporate all three into the written contract. This helps franchisees understand the duration of the relationship and gives the franchisor a sound basis for deciding whether to continue it.