Buying a franchise: Align your franchise agreement and commercial lease

When you buy a franchise involving a shop, clinic or restaurant, you are not just buying access to a business concept. You are often also taking on a long-term commitment to premises. If the franchise agreement and commercial lease do not align, your right to use the brand could end while your rent obligations continue. The two agreements should therefore be reviewed and negotiated as parts of a single investment.

1. Understand the rules and who bears the risk

Denmark has no dedicated franchise legislation. Nor are there any specific statutory franchise registration requirements or a mandatory disclosure document that the franchisor must provide before the agreement is signed. This does not affect the business’s general registration obligations or any requirements for operating permits.

Franchise agreements are governed primarily by the Danish Contracts Act and general principles of contract law. Depending on the relationship, other legislation may also apply, including the Danish Competition Act, Marketing Practices Act and Commercial Lease Act. Section 36 of the Contracts Act allows unreasonable contractual terms to be amended or set aside, but you should not base your financial planning on the assumption that this provision will later rescue you from a poor agreement.

The absence of specific disclosure requirements does not mean that a franchisor is free to withhold material information or provide misleading information. General contractual duties of good faith and disclosure may be relevant. Ask for written answers on matters that are critical to how you can use the premises and the costs involved.

First, establish who your landlord is. Will you rent directly from the property owner, or sublet from the franchisor? If you are subletting, check the term of the head lease, whether subletting is permitted and what happens if the head lease ends. A good franchise agreement does not, in itself, secure your right to occupy the premises.

2. Put both agreements on the same timeline

Draw up an overview of the dates and deadlines in both agreements. Use the actual draft contracts rather than descriptions in sales material. Your overview should cover at least:

• When the agreements become binding and when payments begin.
• When you take possession of the premises and when the outlet is expected to open.
• The duration of each agreement, any periods during which notice cannot be given, and notice periods.
• Deadlines and conditions for requesting an extension.
• When any mandatory refurbishment or changes to the business concept must take place.

Danish law does not give franchisees an automatic right to renew their franchise agreement. Such a right must be agreed. A promise that the parties will discuss continuing the relationship is not the same as a binding renewal option.

Imagine that the franchise agreement expires while you are still locked into the lease. You could be left paying for premises from which you can no longer trade under the chain’s name. The reverse is just as problematic: the franchise continues, but the landlord is unwilling to renew the lease.

Negotiate aligned contract terms and clear renewal provisions. Also ask whether the lease permits a different business use if the franchise ends. A narrowly drafted permitted-use clause could limit your alternatives, even if the location is attractive.

3. Make opening conditional on the essential approvals

As far as possible, avoid becoming unconditionally bound by one agreement before the other is in place. Ask an adviser to draft precise conditions covering matters such as finance, the franchisor’s approval of the premises, the landlord’s approval of the fit-out and any necessary regulatory permissions.

Each condition should state who must do what, by which date, and what happens if it is not met. Also agree whether any sums already paid will be refunded. The wording “subject to approval” is not enough if nobody knows which approval it refers to.

Next, establish who pays if there is a delay. Rent, finance repayments and any franchise fees may become payable before you start generating revenue. Ask for a clear allocation of responsibility if refurbishment, deliveries or outstanding approvals delay the opening.

Prepare a separate premises budget covering the deposit, any rent payable in advance, fit-out, installations, professional advice and ongoing running costs. Include the costs of vacating the premises as well. Establish in writing who owns the fixtures, fittings and equipment, and which installations must be removed or left behind. Base the figures on quotations and agreements, not on the assumption that the chain’s standard budget will suit every location.

4. Agree a realistic exit route

Review at least three scenarios: expiry at the end of the agreed term, early termination on notice, and termination for breach. Ending the franchise agreement does not necessarily end the lease. Even if the franchisor is also your landlord, the link between the two agreements should be explicit.

Ask for specific answers to the following:

• Can the business and lease be transferred to a new franchisee, and who must approve the buyer?
• Does the franchisor have a right or an obligation to take over the premises or buy the fixtures, fittings and equipment?
• How will the price be determined if a takeover takes place?
• When will the deposit be returned and any guarantees, including personal guarantees, be released?
• Who pays to remove signs, branded fittings and specialist installations?

Do not assume that you will automatically receive compensation from the franchisor when the agreement lawfully ends. Any claims and rights must be assessed on their particular facts. Questions of protection and compensation under commercial tenancy law must be considered separately; those rules cannot simply be applied to the franchise relationship.

Practical takeaway: Only sign once you know when both agreements start and end, what a delay will cost and how you can exit. Have the same adviser review how the agreements work together, and make sure the key arrangements are written into them.