Buying a franchise: how to align your franchise agreement and premises lease

A strong brand and an attractive location are not enough if the franchise agreement and the lease for your business premises impose incompatible obligations. You could lose the right to use the brand but still have to pay rent, or lose the premises while franchise fees remain payable. When joining a franchise network in Croatia, review these two agreements together, before signing or making any non-refundable payments.

1. Establish the rules and each party’s responsibilities

Croatia has no specific franchise law or legally prescribed pre-contractual disclosure document for franchises. Franchise agreements are governed by the Croatian Civil Obligations Act, including the principle of good faith and fair dealing and the rules on negotiating, entering into and performing contracts. Depending on the nature of the relationship, the Competition Act, applicable EU rules and the Trade Mark Act may also be relevant.

Leases of business premises are subject to the Lease and Sale of Business Premises Act, alongside the Civil Obligations Act. A lease of business premises must be in writing. Additional rules apply to certain premises, particularly publicly owned properties, and should be checked separately.

A franchisor’s approval of a location does not confirm that the premises meet the legal requirements for your business activity. Equally, a landlord’s statement that premises are “ideal for a franchise” does not guarantee that the brand will accept them. The agreements should clearly allocate responsibility for checking the permitted use of the premises, relevant requirements, consents and technical specifications.

2. Secure the necessary approvals before making a binding commitment

The riskiest approach is to take on premises unconditionally first, then seek the brand’s approval and financing. Rent may already be payable while you wait for decisions.

Before making final commitments, obtain:

• written approval of the location from the franchisor, including any conditions;
• evidence of ownership and the landlord’s authority to let the premises;
• the documents needed to verify that the premises can lawfully be used for the planned business activity;
• consent for building works, brand signage, installations and any other necessary alterations;
• a fit-out cost estimate based on the actual condition of the premises.

If approvals are still outstanding, discuss with a lawyer whether to include conditions precedent or an express right to withdraw if the conditions are not met by a specified date. Set out precisely how deposits and other payments will be refunded. Do not assume that calling a document a “reservation” or “preliminary agreement” means you can withdraw without consequences.

3. Compare timings, fees and investment requirements

Create a single timeline for both agreements. Mark the handover of the premises, the start of works, the date rent becomes payable, the opening deadline, the start of franchise fees and the expiry of each agreement.

Pay particular attention to what happens if the fit-out is delayed. A rent-free period does not necessarily exempt you from utility bills, shared building costs or other charges. The franchise agreement may also impose fees or other consequences if the outlet does not open on time.

Compare the lengths of the agreements too. If the lease is shorter than the franchise agreement, renewal needs to rest on more than a verbal promise. Check whether there is a contractual right to extend the lease, how it must be exercised and how the new rent will be set. If the lease is longer, calculate the obligations that would remain after the franchise ends.

Include potential refurbishment to meet updated brand standards in your budget. Establish who pays for the work, whether the landlord’s approval is required and what happens to installed equipment when you leave. Do not base your return-on-investment calculations on the assumption that both agreements will definitely be renewed.

4. Agree a workable exit and transfer arrangements

Ending one agreement does not generally terminate the other automatically. Check each agreement separately for termination on notice, termination for breach, periods allowed to remedy a breach and the financial consequences.

Ask the franchisor whether relocation is permitted if you lose the premises, and on what conditions it would approve a new location. Seek clear terms from the landlord covering early exit, assignment of the lease and subletting. One party’s consent does not replace the other’s.

Consider a future sale of the business as well. A prospective buyer may need the brand’s approval, have to enter into a new franchise agreement and negotiate a lease separately. Without aligned terms, you could find a buyer but be unable to transfer the business.

Finally, agree the arrangements for removing signage, restoring the premises to the agreed condition, removing equipment and returning the deposit. Check whether personal guarantees remain in force after you leave or transfer the business. Do not accept a vague obligation to carry out “full reinstatement” without understanding its scope and potential cost.

5. Carry out a final review of both agreements

Give your lawyer both draft agreements, their schedules, the fit-out standards and any written promises made during negotiations. Show your accountant the full payment schedule. Together, assess three scenarios: delayed opening, non-renewal of the lease and early termination of the franchise.

For each scenario, write down what you would have to pay, for how long and whether you could continue trading at another location. If the answer depends on the other party’s future goodwill, that is a risk the contracts have not yet addressed.

Practical takeaway: do not treat signing the lease and the franchise agreement as two unrelated decisions. Align approvals, contract lengths, investment requirements and exit terms so that you join the franchise network with a workable plan, rather than two sets of conflicting obligations.