Franchise agreements: planning for conditions precedent

Your business is ready to welcome its first franchisees, but their funding or lease arrangements remain uncertain. Should you wait or sign? Conditions precedent allow you to manage this period without treating unresolved matters as settled. When properly drafted, they protect both parties’ commitments and prevent a troubled opening from undermining your entire franchise network.

1. Distinguish a condition from a straightforward obligation

A condition precedent makes an obligation dependent on a future, uncertain event. For example, a contractual commitment may be conditional on obtaining a loan with specified characteristics. If the event occurs, the obligation becomes unconditional; if it does not, the conditional obligation is deemed never to have existed.

In France, this mechanism is governed by Articles 1304 onwards of the Civil Code. More broadly, franchise agreements fall within general contract law, commercial law and competition law. There is no single statutory framework governing every aspect of these agreements.

The clause must identify precisely which obligations are suspended. It may leave certain commitments immediately binding, such as confidentiality or the steps needed to obtain funding. Avoid blanket wording that suggests the entire agreement is both in force and suspended at the same time.

Another point to watch: a condition whose fulfilment depends solely on the wishes of the party owing the obligation may render that obligation void. ‘Provided the franchisee ultimately wishes to open’ does not offer the certainty of an external, verifiable event. Have the arrangement reviewed by a lawyer with franchise expertise.

2. Include only obstacles that are critical to opening

When developing your business into a franchise network, start with the project’s genuine dependencies. The aim is not to create multiple escape routes, but to identify the events without which trading cannot reasonably begin.

Three situations deserve particular consideration:

• Funding: specify the amount sought, the proposed loan term, any maximum acceptable interest rate and the supporting evidence required. Simply stating ‘subject to bank approval’ leaves too many questions unanswered.
• The legal right to occupy and use the premises: identify the lease or other legal document required, the premises concerned and the permitted use needed for the business. A commercial understanding over a location is no substitute for a legal right to operate there.
• An essential approval: specify the exact administrative approval required where the activity or building works demand one. Do not create a vague condition covering ‘all approvals’.

For each event, ask whether it is genuinely uncertain, essential and capable of being evidenced by a document. An ordinary task, such as ordering small items of equipment, generally belongs in the opening schedule rather than in a condition precedent.

Also check that the agreements work together: a condition in the franchise agreement does not automatically release the prospective franchisee from commitments to a landlord or supplier.

3. Organise the steps, evidence and deadlines

A useful condition also describes the work needed to fulfil it. Create a shared table showing, for each event, who is responsible for taking action, which documents must be supplied, the deadline and who must receive notifications.

For funding, the agreement may set a deadline for submitting a complete application and require evidence of banks’ responses. The requirements must remain realistic: demanding steps that cannot be completed within the agreed timetable protects no one.

Include a written procedure for extending a deadline. A bank may still be assessing an application after the original date; a variation signed before that date is preferable to a string of ambiguous messages.

The French Civil Code provides that a condition precedent is deemed fulfilled if the party with an interest in its failure has prevented its fulfilment. Deliberate inaction is therefore not a consequence-free way out. Keep relevant applications, responses and follow-up correspondence.

Finally, distinguish support with the project from a guarantee of success: helping a prospective franchisee present their business concept to a bank does not mean guaranteeing that the loan will be granted.

4. Safeguard pre-contractual disclosure and plan for non-fulfilment

Signing subject to a condition precedent does not allow you to bypass pre-contractual disclosure requirements. Where the criteria in Article L. 330-3 of the French Commercial Code, introduced by the Doubin Law, are met, the pre-contractual disclosure document (known in France as the DIP) and the draft agreement must be provided at least twenty days before signing or, where applicable, before any advance payment. Article R. 330-1 specifies the required contents of the DIP.

Include the proposed conditions in the draft supplied to the prospective franchisee. Do not assume that the disclosure period starts only once funding has been secured.

Also set out what happens if a condition is not fulfilled: notification, treatment of payments already made, return of confidential documents and arrangements for any services already provided. Avoid indiscriminately labelling all payments ‘non-refundable’: their treatment must be legally consistent with the conditional obligations.

Key takeaway: before signing, check four elements for every condition: a precisely defined event, a realistic deadline, identifiable evidence and written consequences if it is not fulfilled.