Franchising: making your reservation agreement legally robust

Turning an existing business into a franchise network sometimes involves an intermediate step: temporarily reserving an opportunity to open an outlet for a prospective franchisee before signing the final agreement. This preliminary agreement can help both parties prepare the project, but it already creates obligations. For the prospective franchisor, the priority is to specify what is being reserved, for how long, and what happens to any money paid if the project does not go ahead.

1. Check that the reservation serves a genuine purpose

A reservation agreement is not a compulsory step. It becomes useful when both parties want to move forward together but certain conditions still need to be met, such as securing finance, incorporating the operating company or finding suitable premises.

Before offering one, identify the commitment your business can realistically make. Will you agree not to consider other applicants for a particular location for a limited period? Carry out preliminary studies? Assign a team to help develop the project?

A reservation must not be presented as a guarantee that an outlet will open. It does not, in itself, secure a loan, a lease or the automatic conclusion of a franchise agreement.

Draw up an internal briefing note setting out the purpose of the preliminary agreement, who is responsible for it and the resources allocated to it. If you cannot explain its purpose beyond ‘keeping the applicant waiting’, it is better to continue discussions without creating an ill-defined commitment.

2. Meet pre-contractual disclosure requirements before taking any payment

In France, franchise agreements are governed, among other things, by general contract law and competition law. There is no single statutory framework governing the entire contractual relationship. However, a specific pre-contractual disclosure obligation applies in the circumstances set out in Article L. 330-3 of the French Commercial Code, introduced by the Doubin Law of 31 December 1989.

This provision covers arrangements in which a trade name, trademark or trading identity is made available alongside a commitment to exclusive or near-exclusive activity. Article R. 330-1 of the same code specifies the information that must be disclosed.

Where these rules apply, provide the pre-contractual disclosure document, known in France as the DIP, and the draft agreement at least twenty days before the relevant agreement is signed. This period must also be observed before any payment required ahead of signing, particularly a payment to reserve a territory. A preliminary agreement must not be used to circumvent this protection.

Keep dated evidence of delivery and record which versions were supplied. Provide both the draft reservation agreement and the draft franchise agreement so that the applicant understands the full process envisaged. This period allows time for consideration before signing; it does not create a general right to withdraw afterwards.

3. Specify exactly what happens to the money paid

Where a payment is requested before the final agreement, Article L. 330-3 requires the services provided in return, and each party’s obligations if either withdraws, to be set out in writing. A vague description such as ‘non-refundable administration fees’ is therefore not enough to make the arrangement legally robust.

The preliminary agreement should clearly distinguish between:

• the purpose of the payment and when it is due;
• the services actually planned during the reservation period;
• whether the payment will be credited towards the future initial franchise fee;
• the circumstances giving rise to a full or partial refund;
• the agreed refund procedure and deadlines.

Consider several scenarios: finance being refused, failure to find suitable premises, the applicant withdrawing, or the franchisor deciding not to proceed. The financial consequences should be clear to both parties, without suggesting that the same outcome automatically applies in every case.

Have a legal professional review the legal classification of the payment and the withdrawal clauses. The right to retain money does not become beyond challenge simply because the agreement describes the payment as non-refundable.

4. Plan for expiry without ambiguous extensions

Set a fixed term, verifiable milestones and a list of documents to be provided. For example, the applicant may be required to report on progress with loan applications, while the franchisor may undertake to review the information received according to an agreed timetable.

Specify what happens when the reservation expires: signing the final agreement, agreeing an extension in writing or ending the reservation. Avoid informal renewals over the telephone, which leave uncertainty about which commitments remain in force.

Before the final agreement is signed, also check whether any information material to the decision to enter into it has changed. A reservation does not remove the need to update information required for informed consent or to have the implications of a significant change to the proposed agreement assessed.

Key takeaway: before entering into any reservation agreement, document its purpose, comply with the disclosure timetable and put the exit terms in writing. A clear preliminary agreement helps protect trust within your future franchise network.