Franchising in Denmark: Align the Lease and Franchise Agreement

When you expand an existing business into a franchise network, premises can become an overlooked commitment. A franchisee may have signed a lease before financing or the franchise agreement is in place. As a prospective franchisor, you should therefore establish how the two agreements will work together before looking for your first location. This guide is particularly relevant to concepts involving shops, cafés, clinics or other fixed customer-facing premises.

1. Decide who will be the tenant

There is a significant difference between approving premises and taking on liability for them yourself. Choose a clear approach to leasing before presenting the concept to potential franchisees.

The franchisee rents directly from the landlord. Under this model, the franchisee enters into the lease and generally bears the obligations under it. You can require approval of the location and fit-out under the franchise agreement, but your approval does not in itself give you any rights against the landlord.

The franchisor rents and sublets. This model can give you more control over the location, but it also carries financial risk. If the franchisee fails to pay, your own obligations to the landlord will generally remain in place. Subletting must be permitted, and the head lease and sublease must work together.

Draw up a short document setting out:

• who pays the deposit and any rent in advance;
• who funds and owns the fit-out;
• who is responsible for maintenance and repairs;
• whether anyone provides a guarantee, and exactly what it covers.

Avoid taking on the head lease solely to secure an attractive location. Also calculate the financial impact of a vacancy and a possible change of franchisee.

2. Understand the Danish rules governing premises

Denmark has no specific franchise law. Franchise agreements are subject to the Danish Contracts Act and general principles of contract law, while legislation such as the Danish Marketing Practices Act and competition rules may also be relevant. Nor is there a specific statutory requirement to register franchise agreements or a franchise-specific pre-contractual disclosure regime. This does not absolve the parties of liability for incorrect or misleading information.

For commercial premises, the Danish Business Lease Act (erhvervslejeloven) is central. It governs the relationship between landlord and tenant, and many terms are negotiable. Some provisions, however, are mandatory. A franchise agreement alone cannot alter the landlord’s rights or give the franchisor the right to take over the lease.

Have an adviser review both the lease and its relationship with the franchise agreement. Particular attention should be paid to provisions on permitted use, alterations, subletting, assignment, termination and reinstatement. For some premises, statutory protection linked to the business’s dependence on its location may also be relevant if the landlord terminates the lease; the assessment depends on the specific circumstances.

A landlord’s consent to a café or clinic is not the same as approval from the authorities. Local planning rules, lawful use, building approvals, fire safety and any activity-specific requirements must be checked separately. Allocate responsibility for these checks and applications in writing.

3. Make premises approval specific and conditional

A good location does not necessarily mean suitable premises. Use the experience gained from your existing business to create a short premises brief, distinguishing non-negotiable requirements from aspects that can be adapted.

For example, describe the requirements for customer access, deliveries, storage, ventilation, electrical capacity and staff facilities. Distinguish between regulatory requirements, essential operational needs and aesthetic preferences. This helps prevent an expensive design preference from being treated as a technical necessity.

Then use an approval process with three clear stages:

1. Preliminary assessment: Do the location and the basic characteristics of the premises suit the concept?
2. Technical and financial review: Have alterations, permissions and total premises costs been investigated sufficiently?
3. Final approval: Have the agreed conditions been documented, and has responsibility for outstanding tasks been assigned?

State what your approval covers. Approval of the premises for the concept should not be confused with a guarantee of profitability or technical approval of the building.

If the franchisee needs to sign early, appropriate conditions should be negotiated into the lease, for example covering financing, the franchise agreement and necessary permissions. These conditions must have clear deadlines and specify what happens if they are not met. They require the landlord’s agreement and should be professionally drafted with legal advice.

4. Bring deadlines and finances together before signing

Create a single timeline covering the handover of the premises, the fit-out period, the start of payments, the expected opening date and the term of the franchise agreement. The dates do not have to match, but any differences must be deliberate and funded.

A particular risk arises if the lease cannot be terminated for a period longer than the franchisee’s guaranteed right to operate the concept. The reverse can also cause problems: a long franchise agreement is of little help if the premises cannot be retained. Extending one agreement does not automatically extend the other.

Ask the franchisee to include all premises costs in the financing plan: rent, service charges, utilities, deposit, professional advice, fit-out and any reinstatement costs. Clarify the VAT treatment with an adviser too. Model a delay scenario in which rent becomes payable before customer revenue starts coming in.

Finish with a joint review involving the franchisee, the franchisor and their relevant advisers. Record outstanding questions, assigning each an owner and a deadline, rather than leaving them as verbal expectations.

Practical takeaway: Do not just approve the location. Align the tenant arrangements, permissions, finances and deadlines before anyone becomes unconditionally bound. This gives the franchise network a more sustainable foundation.