Franchising in Denmark: Agree the Conditions for Opening

Signing a franchise agreement does not necessarily mean the new outlet can open. Funding may fall through, premises may prove unsuitable, or a necessary permit may not be granted. When developing your existing business into a franchise network, the agreement should therefore set out the steps from signing to opening — and what happens if opening proves impossible. This means setting clear conditions for opening, not simply an expected opening date.

1. Distinguish between signing and opening

Denmark has no specific franchise legislation, franchise registration scheme or statutory franchise disclosure document. Franchise agreements are governed primarily by the Danish Contracts Act and general principles of contract law. Section 36 of the Contracts Act allows unreasonable agreements or terms to be amended or set aside. Depending on the activities involved, other legislation also applies, including the Danish Competition Act, the Danish Marketing Practices Act and rules on the necessary operating permits.

There is therefore no special government franchise approval that makes an outlet ready to open. The parties must plan this themselves, and their internal approvals do not replace regulatory requirements.

Ask a legal adviser to distinguish between three stages in the agreement:

• Signing: Which obligations apply immediately, such as confidentiality and work on setting up the outlet?
• Satisfaction of conditions: When are funding, premises and necessary permits sufficiently settled?
• Opening: When may the outlet start serving customers under the network’s name?

Avoid stating that the entire agreement only takes effect on opening if provisions covering preparatory work and costs need to apply earlier. Instead, specify precisely which obligations are conditional and which apply from signing.

2. Make each condition specific and verifiable

A condition stating that ‘all matters must be satisfactory’ does not give the parties a workable plan. Choose only conditions that are essential to setting up the outlet, and specify how compliance will be documented.

The funding condition could, for example, require evidence that finance is in place to cover the agreed set-up budget. If the lender’s commitment is itself conditional, the parties must establish whether it actually satisfies the condition. A non-binding meeting with the bank is not the same as having access to the money.

For premises, the condition should address whether they can lawfully and practically be used for the intended activity. Internal approval of the fit-out does not, in itself, establish that the use is lawful. A food business, for example, may need to be registered or authorised, depending on its activities.

Prepare a checklist covering five points for each condition:

• What must be in place?
• Who is responsible for arranging it?
• What evidence is required?
• When must that evidence be available?
• Who checks that the condition has been satisfied?

Use objective criteria wherever possible. If the franchisor has discretion, the agreement should define its limits. The franchisee should be able to understand what is missing and how to put it right.

3. Allocate the financial risk before opening

Financial exposure often arises before the first customer walks through the door. Fixtures and fittings may have been ordered, equipment purchased and time spent providing set-up support. The opening conditions must therefore be accompanied by a clear agreement on costs.

Separate payments to the franchisor from commitments to third parties. For payments to the franchisor, specify the particular service each payment covers, when that service is considered delivered, and what will be refunded if opening proves impossible. A blanket clause stating that all payments are forfeited should not be included without a specific legal assessment.

For orders placed with third parties, the parties should agree who may place orders and who bears any cancellation losses. An internal agreement between franchisor and franchisee does not automatically alter a supplier’s rights under an order already placed.

Consider postponing orders that cannot be cancelled until the key conditions have been satisfied. If something must be ordered earlier, the responsible party should understand the risk and accept it in writing. This is more transparent than arguing afterwards about who encouraged the work to begin.

4. Agree a final deadline and a clear exit process

An expected opening date is not necessarily a final deadline for completing the set-up process. Agree the latest date by which the parties must decide whether the conditions can be satisfied.

Set out how an extension is to be agreed and what happens if no extension is agreed. Will the agreement lapse automatically, or must one party give notice that it is withdrawing? Which payments must be settled, and what happens to materials supplied and equipment ordered?

Also distinguish between a condition that remains unmet despite good-faith efforts and a party failing to carry out its agreed tasks. These situations should not automatically have the same consequences.

General principles requiring good-faith disclosure also apply before the agreement is entered into. Known obstacles to opening should therefore not be hidden behind a broadly worded condition. Share material information and keep a record of changes to the set-up plan as they arise.

Practical tip: Create a single, shared opening checklist covering conditions, evidence, responsibilities, deadlines and financial consequences. Ensure it is consistent with the franchise agreement before anyone makes substantial, irreversible investments.