Buying a franchise: how to align your commercial lease

You have chosen a brand and found premises, but those two arrangements do not yet add up to a secure business proposition. If the lease and franchise agreement are not aligned, you could remain liable to pay rent on premises where you can no longer trade under your chosen brand. Joining a franchise network therefore also requires careful scrutiny of your relationship with the landlord, particularly before signing the lease and starting the fit-out.

1. Separate brand approval from the right to use the premises

The franchisor’s approval of a location means that the premises meet its commercial criteria. It does not, in itself, establish that you may use them for your intended business, install signage or carry out the necessary works. Equally, signing a lease does not mean that the franchisor will accept the location.

Before committing, obtain written confirmation from the franchisor clearly identifying the premises and setting out any conditions of approval. If approval depends on alterations, ask for a specific description of the work required, rather than simply a statement that the premises must meet brand standards.

Check the following with the landlord and relevant professional advisers:

• who has the authority to let the premises;
• whether their permitted use covers your intended business activity;
• whether additional permits, consents or technical modifications are required;
• whether you may alter building services, the façade and the internal layout;
• whether there are restrictions on access, deliveries, noise or opening hours.

The franchisor’s approval is no substitute for legal and technical due diligence on the premises. In particular, clarify who bears the cost if those checks reveal that a mandatory brand standard cannot lawfully be implemented.

2. Make the link between the two agreements explicit

Croatia has no dedicated law comprehensively regulating franchising, nor a specific mandatory pre-contractual disclosure regime for franchises. Franchise agreements are governed by the general rules of the Croatian Obligations Act and, depending on the nature of the relationship, competition and intellectual property legislation. Commercial leases are subject to the Act on the Lease and Sale of Business Premises, alongside the applicable general rules of obligations law.

This does not create an automatic link between the agreements: the end of the franchise does not, by itself, terminate the lease, nor does losing the premises necessarily release the franchisee from all franchise obligations. These consequences need to be expressly addressed.

Discuss with a lawyer whether the lease taking effect can be made conditional on final approval of the premises by the franchisor and confirmation that the necessary requirements for the intended business activity are met. At the same time, check whether the obligation to operate at that location under the franchise agreement can be made conditional on actually securing the right to use the premises.

Compare the start and end dates, notice periods and renewal conditions in both agreements. The option to continue the franchise is not enough if the landlord is under no obligation to renew the lease. Nor does a long lease protect you if, after the franchise ends, you cannot use the premises for another permitted business activity.

3. Calculate the cost of fitting out and reinstating the premises

Brand requirements often affect the layout, building services, lighting and external signage. However, while the franchisor sets the standards, the landlord may impose separate conditions on the works. Before ordering equipment, ensure that both parties’ written consents are consistent with the technical plans and necessary approvals.

Prepare a cost breakdown that separately identifies work to the premises themselves, removable equipment and branded features. For each item, record who pays for it, who will own it and what happens to it when the lease ends.

In particular, negotiate the following:

• whether rent starts accruing during the fit-out or after the fitted-out premises are handed over;
• whether there is a rent-free period and which other costs you must still pay during it;
• whether installed building services remain with the landlord without compensation;
• whether you must restore the premises to their original condition;
• who repairs damage caused by removing equipment and signage.

For example, an obligation to remove a distinctive branded interior after the franchise ends may conflict with the landlord’s requirement that fitted elements remain untouched. Resolve such conflicts before investing. Do not assume that investing in someone else’s premises automatically entitles you to recover your costs.

4. Agree in advance what happens if you lose the premises

Check what the franchise agreement provides if the premises become unusable or the lease ends through no fault of your own. Seek a clear procedure for approving a replacement location, a relocation deadline and an agreement on your obligations while trading is interrupted. These are matters for negotiation, not rights you should assume you have.

If the franchisor wants the option to take over the premises after you leave, a clause in the franchise agreement alone will not bind a landlord who is not a party to it. Check whether the landlord’s consent is required and how the takeover of the lease will be arranged. It is also important that any takeover does not leave your guarantee obligations or outstanding liabilities unresolved.

Practical takeaway: before signing, put both agreements before the same legal adviser. Ask for a combined review of premises approval, the duration of your obligations, investment costs and the consequences of termination. Do not invest in the fit-out until it is clear that you may use the premises, implement the brand standards and exit the arrangements on clearly understood terms.