Franchising a Hong Kong Business: Setting Renewal Terms and End-of-Term Review Procedures

When preparing to franchise an existing business, companies often focus first on opening outlets and setting fees, leaving renewal discussions until the agreement is about to expire. Once a franchisee has invested in building a customer base, differing expectations about whether the business can continue may easily lead to disputes. For Hong Kong’s franchise sector, a clear renewal framework is more than an administrative arrangement: it gives franchisors and franchisees a sound basis for planning investment, support and the length of their relationship.

1. Distinguish between a right to renew and fresh negotiations

The agreement should clearly specify the renewal model rather than simply state that it is ‘renewable on expiry’. That wording does not explain who makes the decision, which conditions must be met or what terms will apply for the next period.

There are three common approaches:

• A right to renew if specified conditions are met: A franchisee who applies on time and meets the stated conditions is entitled to continue the relationship. The franchisor should not introduce additional requirements that were not previously agreed.
• Renewal by mutual agreement: The parties may negotiate before expiry, but a new agreement is not guaranteed. Recruitment materials should therefore not describe renewal as guaranteed.
• Automatic renewal: The relationship is automatically extended unless either party gives notice of non-renewal in accordance with the agreement. The agreement must specify the length of each extension, how many extensions are permitted and how notice must be given.

Hong Kong has no legislation specifically regulating franchising, nor a generally applicable franchise registration or statutory pre-contract disclosure regime. Renewal depends primarily on the agreement, subject to common law contract principles and applicable legislation such as the Misrepresentation Ordinance. Brand licensing also involves intellectual property legislation, including the Trade Marks Ordinance. Do not assume that franchisees have a statutory right to automatic renewal, or apply mainland China’s franchise filing requirements to Hong Kong.

2. Turn renewal conditions into verifiable criteria

Terms such as ‘good performance’ or ‘to the franchisor’s satisfaction’ make it difficult for franchisees to assess their eligibility in advance. A more practical approach is to set out each condition in a schedule, together with the supporting documents, assessment period and person responsible, ensuring that the schedule is consistent with the main agreement.

For example, payment compliance can be assessed against reconciled accounts and amounts due; operational compliance can be checked against inspection reports already issued and records of corrective action; and outlet managers’ qualifications can be verified through specified training and assessment records. If a disputed payment remains unresolved, explain how it will affect renewal rather than automatically treating it as arrears.

Franchisors should also distinguish between minor deviations that have been corrected, recurring problems and material breaches. Specify which issues can be remedied, what evidence must be submitted and who will confirm completion. Avoid confirming that corrective action is complete only to treat the same issue as unresolved at renewal.

If renewal requires equipment refurbishment or an outlet upgrade, explain the scope, expected timetable and approval process well in advance. Additional capital expenditure will affect a franchisee’s willingness to continue and should not be introduced unexpectedly after the application deadline.

3. Define the next term’s conditions and fees in advance

Renewal does not necessarily mean simply moving the expiry date. The franchisor should decide in advance whether to extend the original agreement, use a supplemental agreement or enter into a new agreement, and explain how existing rights and outstanding obligations will be handled.

If franchisees must sign the ‘then-current standard agreement’, that broad statement alone is not enough. Specify when the full text will be provided and identify the main differences between the old and new versions, particularly ongoing fees, the scope of the licence, support provided and the renewal term. This gives franchisees time to seek independent legal advice.

Renewal fees should also be specified, either as a fixed amount or by a calculation method, together with payment dates and refund arrangements if an application is rejected or negotiations fail. If a separate assessment fee is charged, explain what work it covers and whether it is refundable, so that ‘accepted for assessment’ is not mistaken for ‘approved’. Any renewal support to be provided at the franchisor’s expense, such as refresher training or system set-up, should also have clearly defined deliverables.

Do not confuse renewal approval with a release from all past liabilities. If historical disputes need to be settled, record the arrangements clearly and separately for legal review, rather than burying them in a standard renewal confirmation.

4. Establish an end-of-term process with response deadlines

Franchisors can work backwards from the agreement’s expiry date: issue reminders, receive applications, check documents, identify matters requiring corrective action, provide the next term’s conditions and, finally, issue a written decision. Deadlines at each stage should reflect the practical needs of the business. An internal deadline should not be presented as a requirement of Hong Kong law.

Create an expiry checklist recording at least the following:

• Deadlines for renewal applications and notices of non-renewal;
• Valid methods of serving notices, including the relevant addresses and recipients;
• Deadlines for supplying missing documents and for the franchisor’s response;
• Written records of approval, conditional approval or refusal;
• The signing date of the new agreement and the date on which the licence takes effect.

If the assessment is incomplete and the original agreement is about to expire, the parties may consider a written short-term extension. This should clearly state its duration, applicable fees, brand usage rights and arrangements at the end of the extension, as well as whether it constitutes a formal renewal. Do not infer agreement on all terms for the next period merely because supplies continue or fees are collected.

The franchisor should also specify what happens if it misses its own response deadline, rather than requiring only the franchisee to be punctual. Receipt of a renewal application, approval of renewal and receipt of payment should preferably be confirmed in separate documents, reducing the risk that administrative correspondence is interpreted as a commitment.

Practical takeaway: Before recruiting the first franchisee, prepare a renewal terms schedule and an end-of-term process chart, then ask a Hong Kong lawyer to check that they are consistent. Make renewal a predictable assessment process, rather than an improvised negotiation when the relationship reaches the end of its term.