Leasing premises for a franchise: what to agree before investing

When preparing an existing business for franchise expansion, it is easy to assume that a future partner will simply find premises and fit them out to your standards. But the right to use premises is separate from the right to use your brand. A stable franchise network requires the franchise agreement, the lease and the work needed to make the outlet operational to be aligned from the outset.

Separate franchise rights from rights to the premises

A franchise agreement may allow a partner to use your business system and trade mark, but it does not, in itself, grant the right to enter particular premises, refurbish them or install signs on the façade. Those rights need to be checked against ownership, the lease and any necessary consents.

Croatia has no dedicated law comprehensively regulating franchising, nor a specific statutory regime requiring a pre-contractual franchise disclosure document. General legislation applies, particularly the Civil Obligations Act and, depending on the nature of the relationship, competition law and the Trade Mark Act. Commercial leases are governed by the Act on the Lease and Sale of Business Premises, alongside general rules on contractual obligations.

For a business registered as an obrt — a Croatian form of trade business — that requires premises, the Trades Act requires proof of the right to use them. According to guidance from the Croatian Chamber of Trades and Crafts, this may be based on ownership, a lease agreement or the owner’s written consent permitting the specific business activity. However, proof of the right to use premises does not replace compliance with the technical and other requirements for carrying out that activity.

Practical rule: your approval of premises confirms that they fit the franchise concept, but it does not replace the owner’s consent or a decision by the competent authority.

Decide who will sign the lease

Before drafting the documentation, decide whether the franchisee will lease the premises directly or whether you will lease them and then allow your partner to use them on an appropriate legal basis. This is more than an organisational choice: it determines who owes the rent, provides security for payment and is accountable to the landlord.

If the franchisee signs the lease directly, the franchisor can specify in advance which terms need to be checked. However, the franchisor should avoid creating the impression that it guarantees the partner’s obligations unless it has expressly given such a guarantee.

If the franchisor leases the premises and intends to sublet them to the partner, it must first check whether the lease permits this. Do not assume that the right to lease premises automatically includes the right to hand them over to another business. Premises owned by the state or local authorities require particular attention, as additional rules apply.

For either model, draw up a simple table of responsibilities:

• who pays the rent, utilities, deposit and maintenance costs;
• who reports faults and communicates with the landlord;
• who obtains consent for works;
• who insures the premises and equipment, in line with the agreed obligations;
• who bears the cost of reinstating the premises on departure.

The table is a planning tool; the agreed obligations should then be clearly incorporated into the relevant contracts.

Check whether your standards can actually be implemented

Your existing outlet may have ventilation, building services or external signage that cannot easily be replicated at a new address. Fit-out standards should therefore be more than a list of furniture and colours. They need to be translated into a schedule of works requiring legal and technical checks.

Before ordering equipment, establish whether the concept requires changes to building services, work on load-bearing structures, ventilation outlets, advertising on the façade or use of communal areas. Depending on the work involved, consent from the owner or other authorised parties may be required, as may the relevant procedures under construction legislation and local rules.

Specify the permitted use of the premises precisely in the lease documentation. General wording may not clearly cover the actual operation, such as food preparation, deliveries or activities that generate noise.

Then separate three questions: who approves the design against franchise standards, who gives the owner’s consent and who checks whether the proposed works are legally permitted. One approval does not replace the others. Also agree what happens if necessary work is not permitted: adapting the design, deciding against the premises or another agreed solution.

Agree how investment and handover will be handled

Fitting out an outlet often brings together the franchisee’s money, the franchisor’s standards and a third party’s property. Before investing, record who owns the equipment, which items will remain in the premises and whether the partner may remove them. In particular, distinguish freestanding equipment from built-in fixtures.

Do not assume that the landlord must reimburse all investment costs. Compensation, removal and reinstatement should be addressed in the contract, with the applicable legal rules checked. Keep consents, cost estimates, invoices and photographs of the premises’ initial condition.

If you want another member of the franchise network to be able to take over the premises after the partner leaves, agree this with the landlord. A clause in the franchise agreement alone cannot bind a property owner who has not agreed to that arrangement.

Practical takeaway: before placing the first equipment order, obtain proof of the right to use the premises, check which works are permitted and allocate investment and exit costs in writing. Only commit to franchise standards once you know they can lawfully be implemented at the particular premises.