Buying a franchise: Make sure the lease fits the concept

When you buy into a franchise network, the premises can determine whether the concept works in practice. But the franchisor’s approval of a location does not mean you are allowed to run the planned business there, or that the lease terms fit your obligations. Before signing or ordering fit-out work, assess the premises and both agreements together.

1. Establish who your landlord is and how you can use the premises

Start by identifying your landlord. Will you rent directly from the property owner, sublet from the franchisor or take over an existing lease? The arrangement determines who you need to negotiate with and which documents your adviser should review.

If you are subletting, ask for the relevant terms of the head lease and evidence of the right to sublet. Have an adviser assess what happens to your right to occupy the premises if the head lease ends. A franchise agreement does not, in itself, guarantee that you can remain in the premises.

Next, check the permitted-use clause in the lease. It needs to cover your actual operations, rather than simply using a vague description such as retail or commercial use. Consider, for example, food preparation, customer visits, goods collection, opening hours and any outdoor activities.

Seek clarification on three separate matters:

• The franchisor’s approval: Do the premises meet the requirements of the concept?
• The landlord’s consent: Does the lease allow your intended operations and the necessary alterations?
• Regulatory requirements: Is the proposed use lawful, and which permits or registrations are required?

One approval does not replace the others. Depending on the concept, investigate relevant requirements relating to local planning, building work, fire safety and food business operations.

2. Understand Danish rules and their limits

Denmark has no specific franchise law. Nor is there a statutory requirement for a franchise-specific disclosure document or for registration of the franchise agreement. The Danish Contracts Act and general principles of contract law apply, while legislation including the Danish Competition Act and Marketing Practices Act may also be relevant.

This does not mean that material information can simply be withheld. Misleading information or bad-faith conduct during negotiations may have legal consequences, depending on the circumstances. However, this is no substitute for carrying out your own checks on the premises.

The Danish Business Lease Act is central to commercial leases. Many terms can be agreed between the parties, while certain rules cannot be departed from to the tenant’s detriment. Have an adviser assess your specific contract rather than assuming that the law automatically gives you a particular right to terminate or protects your investment.

Approval from the franchisor is not necessarily a guarantee that the premises are financially viable or technically suitable, either. Clarify exactly what the approval covers, what investigations the franchisor has carried out and what you need to check yourself.

3. Allocate costs and responsibilities before alterations begin

The concept’s fit-out requirements can make apparently attractive premises expensive. Draw up a detailed schedule of the work needed before the premises can open.

For each item of work, the schedule should identify who commissions it, who pays and who bears the risk of delays. Distinguish between the landlord’s works, your own installations and fit-out work required by the franchisor. Also establish who is responsible for obtaining the necessary permits.

In particular, clarify:

• Whether the electrical supply, ventilation, drainage and access arrangements are suitable for your operations.
• Whether signage and alterations to the façade require separate approval.
• When rent and other payments become payable.
• Who maintains and replaces the installations.
• What you must remove or reinstate when you leave.

Reinstatement deserves particular attention. A fit-out that is compulsory within the franchise network may also have to be removed under the lease. Ask for the approval of the alterations to address the condition in which the premises must be handed back. Keep drawings, approvals and records of the premises’ condition.

4. Do not commit to one agreement without securing the other

The biggest practical risk is being bound by a lease without a franchise agreement you can put into effect. The reverse can also happen: you are obliged to open but do not yet have usable premises.

Discuss with your lawyer whether the agreements should include specific conditions covering the signing of the other agreement, approval of the premises and the necessary permits. Set out deadlines, documentation requirements and the consequences if the conditions are not met. Also clarify what happens to amounts already paid and work already commissioned.

Compare the provisions governing how each agreement ends. Could you still owe rent after losing the right to use the franchise concept? Can the business relocate if the lease ends? And does a transfer of the business require approval from both the landlord and the franchisor? Have these issues assessed together, without assuming that the agreements automatically stand or fall together.

Practical takeaway: Only make a binding commitment to the premises once the permitted use, responsibility for alterations and alignment with the franchise agreement are clear. Use a single overview of approvals, deadlines and costs as the basis for signing.