Franchising in Hong Kong: Setting Clear Terms for Good-Faith Deposits, Deductions and Refunds

When Hong Kong businesses prepare to offer franchises, they often want to collect a good-faith deposit before starting site assessments or other preparatory work. But asking applicants to pay first and discuss the terms later can leave the two sides with different expectations about refunds. To build trust within a franchise network, franchisors should set out the nature of the payment, permitted deductions and refund conditions before accepting money, rather than using the deposit to keep applicants committed.

1. Define the payment clearly — do not simply call it a ‘deposit’

Good-faith deposits, security deposits and franchise fees should not be treated as interchangeable. A payment might confirm an applicant’s interest, pay for specified assessment services or be credited towards the franchise fee once the formal agreement is signed. Each purpose needs appropriate terms.

The franchisor should prepare a separate, concise payment agreement covering at least:

• The full names of the company receiving the payment and the payer;
• The amount, payment date and purpose of the payment;
• The services the franchisor will provide after receiving payment;
• Whether a place will be reserved for the applicant, and for how long;
• Which fee the payment will be credited towards if an agreement is signed, and what happens if it is not.

In particular, the agreement should explain whether payment means the franchise application has been approved and whether it grants any right to use the brand. If no such permission has been given, the applicant should not use a payment receipt as grounds to present their business publicly as a franchised outlet. The document’s title alone does not determine all its legal effects: the actual terms and both parties’ conduct also matter.

2. Hong Kong has no statutory cooling-off period specifically for franchises

Hong Kong currently has no legislation specifically regulating franchising, nor any franchise-specific mandatory disclosure, registration or statutory cooling-off regime. The rules under mainland China’s Regulations on the Administration of Commercial Franchises should not be assumed to apply to local franchise arrangements in Hong Kong.

This does not mean that taking payments is outside the law. The relationship is governed by contract law, including common law and applicable legislation. For example, misleading statements made during recruitment may fall within the scope of the Misrepresentation Ordinance. Even before a formal franchise agreement is signed, an earlier payment agreement may create legal obligations.

The Trade and Industry Department’s business start-up guidance notes that good-faith or security deposits collected before a formal agreement is signed are generally refundable, with reasonable administrative charges deductible as agreed if the parties do not proceed. This is practical guidance. It does not mean that every payment labelled a deposit is automatically refundable in full by law, nor does it authorise franchisors to make arbitrary deductions.

Franchisors should therefore ask a Hong Kong solicitor to review their payment documents. Avoid relying on a blanket ‘non-refundable’ clause, or verbally promising a full refund at any time while including contradictory terms in the paperwork.

3. Base deductions on verifiable expenses

Refund disputes often arise not because no money was spent, but because applicants did not know beforehand which costs they would have to bear. Franchisors should distinguish ordinary recruitment costs from work specifically requested by an applicant. They should not introduce charges for introductory seminars or routine sales follow-up only after an application has been withdrawn.

If expenses are to be deducted from the good-faith deposit, the agreement can set out the following procedure:

1. Itemise costs in advance: Specify the services or third-party charges that may be deducted, rather than grouping them under ‘other miscellaneous expenses’.
2. Obtain prior agreement: Set out quotations, calculation methods or spending caps, and obtain written consent for additional work.
3. Keep supporting evidence: Retain commissioning records, work delivered, invoices and proof of payment.
4. Avoid double charging: Do not deduct the cost of work from the deposit if it has already been charged separately.

For example, if an applicant asks the franchisor to commission an external technical assessment of particular premises, the parties should first agree who will commission it, the cost and who will bear that cost if the application is cancelled. Amounts relating to work not yet commissioned, or sums recoverable from the service provider, should not simply be treated as costs already incurred.

If a separate fixed administrative fee is charged, explain clearly how it differs from reimbursement of actual expenses, and ask a solicitor to assess whether the arrangement is enforceable.

4. Make refunds a trackable process

Refund terms should distinguish between an applicant withdrawing, the franchisor rejecting the application, the parties failing to agree the franchise terms, and the agreed deadline passing without an agreement being signed. Do not treat every outcome as a breach by the applicant.

For each situation, specify how the refund will be calculated, how notice must be given, the processing deadline and who is responsible. The parties may agree the refund deadline, but internal administrative procedures should not be used to justify delaying repayment indefinitely.

In practice, finance staff should maintain a separate ledger for each application, recording payments received, approved expenses and the remaining balance. Once the refund process begins, provide the applicant with a settlement statement. If some deductions are disputed, consider refunding the undisputed balance first and resolving the remainder separately.

Where a franchise agreement is signed, also issue a record showing which fee the good-faith deposit has been credited towards, so that the accounting system does not charge the same amount again.

Practical takeaway: Before collecting the first good-faith deposit, prepare a payment agreement, an expense approval form and a refund settlement statement. Telling applicants how their account will be settled if they withdraw — before they pay — does more to protect trust within the franchise network than explaining afterwards that ‘this is how the company has always done it’.