Hong Kong Franchise Premises Guide: Check Subletting Consent and Head Lease Risks Before Signing

When you join a franchise network, being offered ready-to-use premises can make it tempting to skip due diligence on the tenancy. But franchise rights and the right to occupy premises are separate matters: paying rent and fit-out costs to the franchisor, or even receiving the keys, does not mean the landlord has agreed to your company operating there. This guide focuses on arrangements where the franchisor or an associated company leases premises and then makes them available to a franchisee.

1. Establish who has authority to let you use the premises

Ask the franchisor to identify three parties: the property owner, the tenant under the head lease, and the company that will actually operate the franchise outlet. If another associated company collects the premises charges, ask it to explain its authority to collect payments and grant occupation rights. Companies do not become a single legal entity simply because they use the same brand.

Next, establish what you will be signing: a sublease, a licence to occupy, or a premises arrangement within the franchise agreement. Labels such as ‘management fee’ or ‘licence to occupy’ do not necessarily determine the arrangement’s legal nature. Whether you actually have exclusive possession, the extent of your permitted use and the other terms may all affect that assessment. Have a Hong Kong solicitor review the documents.

Before signing, request at least the following:

• The head lease and supplementary documents: Check the tenant’s identity, the premises covered, the lease term and any signed amendments.
• The landlord’s consent: Confirm whether subletting, licensing, shared occupation or operation by another company is permitted.
• Your occupation agreement: This should specify the areas you may use, access points, storage space, equipment and arrangements for common areas.
• Property ownership checks: Use a Land Registry search to check details such as the registered owner. A search is not a substitute for reading the lease or obtaining any necessary consent.

If the franchisor says the lease is confidential, discuss allowing your solicitor to inspect it under confidentiality arrangements. If you still cannot verify key restrictions, do not make payments solely on the strength of an email ‘guaranteeing that you can open’.

2. Hong Kong has no franchise registration system to verify your tenancy rights

Hong Kong has no franchise-specific legislation, nor a generally applicable statutory franchise disclosure document, franchise registration system or mandatory franchise code. You therefore cannot assume that the franchisor has submitted its lease to the government, or that its ability to recruit franchisees means its premises arrangements have been approved.

Franchise and premises arrangements remain subject to common law contract principles. False statements about rights to the premises made during recruitment may give rise to issues under common law and the Misrepresentation Ordinance. Depending on their actual legal nature, tenancy documents must also be considered under general legislation such as the Conveyancing and Property Ordinance, the Landlord and Tenant (Consolidation) Ordinance and the Stamp Duty Ordinance. Not every franchise premises document is subject to the same requirements. A solicitor should confirm the required form, stamping and any other necessary procedures.

Most importantly, your agreement with the franchisor cannot, by itself, alter the landlord’s rights under the head lease. If the head lease requires prior written consent, permission from the franchisor to move in is not the same as approval from the landlord. Even a promise of compensation from the franchisor may not enable you to remain in the premises if a dispute arises.

Make sure any required landlord’s consent clearly identifies your operating company, the premises, the permitted use and the arrangement. Do not settle for an old document relating to another franchisee or another property. If the company involved or the operating model changes, check again whether consent is required.

3. Compare terms, costs and the circumstances in which you could lose the premises

Read the head lease, your occupation agreement and the franchise agreement side by side. Do not just compare their expiry dates: identify any early termination rights, default provisions and renewal conditions in the head lease. A statement from the franchisor that ‘renewal is usually no problem’ is no substitute for an existing renewal right or a written commitment from the landlord.

For example, if your franchise agreement still has a substantial period to run but the head lease expires sooner, with no confirmed renewal arrangement, you could remain liable for franchise payments after losing your original location. Before signing, agree whether franchise charges will be suspended if you lose the premises, whether relocation is permitted, and what happens to the franchise relationship if relocation is not feasible.

The fee schedule should itemise rent, management fees, rates, government rent, utility charges, deposits and any other premises costs. It should distinguish between costs borne by the franchisor and those passed on against actual bills. If you pay a deposit to the franchisor, do not assume that the landlord is responsible for refunding it directly to you. The agreement should specify who holds the deposit, the grounds for deductions, the refund deadline and the supporting evidence required.

Also ask the franchisor to explain how the following situations would be handled:

• You pay on time, but the franchisor falls behind with rent owed to the landlord.
• The head lease is terminated because of another breach by the franchisor.
• The landlord demands an end to unauthorised subletting or occupation.
• The franchisor and landlord agree to an early surrender of the premises while you still have unrecovered fit-out costs.

Do not assume that paying the landlord’s outstanding rent yourself will necessarily secure your continued occupation. Whether payment, a remedy for the breach or a new direct lease is possible needs to be confirmed with the landlord’s involvement.

4. Turn protection for continued occupation into enforceable arrangements

Useful protection goes beyond a vague promise that ‘the franchisor will assist with tenancy matters’. It should set out specific responsibilities and document-sharing obligations. You can ask the franchisor to confirm that it has disclosed all material restrictions affecting your use of the premises, and to notify you and provide copies within an agreed period after receiving any notice of rent arrears, breach, repossession or termination.

For material changes to the head lease, early surrender or the relinquishment of renewal rights, you can negotiate a process for advance notice and consent. These provisions primarily bind the franchisor; they do not automatically bind a landlord who has not signed the document.

If the landlord is willing, the three parties can negotiate a written arrangement addressing whether, if problems arise under the head lease, the franchisee will have an opportunity to remedy a breach, negotiate a direct tenancy or recover its own equipment. Do not treat these negotiating objectives as statutory rights that franchisees already enjoy, or assume that the landlord must agree to them.

Finally, specify how premises charges for unused periods, deposits, relocation costs and fit-out losses will be dealt with if you lose the premises because the franchisor failed to obtain necessary consent, failed to keep the head lease in force or surrendered it without the required agreement. The allocation of responsibility should reflect the actual risks and the other party’s ability to meet its obligations, and should align with the franchise agreement.

Practical takeaway: Before paying, obtain the head lease, any applicable written consent from the landlord and your occupation agreement, then have a solicitor check all three together. If it is still unclear who authorises your occupation, how long you can stay or what happens if the head lease runs into trouble, resolve those questions before paying for the fit-out.