Franchising in Hong Kong: Setting Renewal Criteria, Deadlines and Fees

A franchise outlet trading steadily does not mean its agreement will renew automatically when it expires. For Hong Kong businesses preparing to offer franchises, renewal arrangements can affect franchisees’ willingness to invest in staff, commit to leases and maintain service over the long term. Rather than leaving discussions until expiry approaches, the first franchise agreement should establish a renewal process with clear deadlines, criteria and verifiable requirements. This gives the franchise network a reasonable basis for planning the next stage of the relationship.

1. Distinguish a right to renew from a fresh application

“Priority for renewal” may sound reassuring, but it does not necessarily explain what rights a franchisee actually has. The brand should first decide which arrangement it wants, then ask a Hong Kong lawyer to translate that commercial intention into contractual terms:

• Renewal subject to meeting specified conditions: A franchisee who applies within the stated period and meets the listed conditions can continue the relationship on the agreed basis.
• Fresh approval on expiry: The franchisor reassesses the application, but approval is not guaranteed. The agreement should explain the assessment criteria and response procedure.
• A new agreement negotiated by both parties: The existing relationship does not continue automatically. The parties must reach a fresh agreement on the term, fees and responsibilities.

Do not promise prospective franchisees that they can “keep operating as long as they perform well” while reserving an unrestricted right to refuse renewal in the agreement. This makes it difficult for applicants to assess their investment and can lead to disputes over what was promised.

Hong Kong currently has no legislation specifically regulating franchising, nor any franchise-specific statutory disclosure, filing or mandatory cooling-off regime. Renewal depends primarily on the contract, subject to common law principles of contract and applicable legislation such as the Misrepresentation Ordinance. There is no general statutory right guaranteeing franchisees a renewal in Hong Kong. The filing and disclosure requirements under mainland China’s Regulations on the Administration of Commercial Franchises should not be treated as rules governing local franchises in Hong Kong.

2. Turn renewal eligibility into verifiable conditions

Phrases such as “good performance” or “to the franchisor’s satisfaction” are not enough to guide approval decisions in practice. A more workable approach is to specify each condition, the supporting documents required, the assessment period and who is responsible for confirming the outcome.

For example, financial checks might cover overdue fees, with separate arrangements for sums genuinely disputed by the parties. Operational checks could consider recorded inspection findings, completion of remedial work and the validity of required licences. Staffing requirements might include confirmation that the outlet manager has completed specified training. These are possible contractual arrangements, not uniform renewal thresholds imposed by Hong Kong law.

The franchisor should also distinguish between material breaches, recurring problems and isolated shortcomings that have already been remedied. For issues that can be put right, specify how notice will be given, the time allowed to remedy them and the review procedure. Franchisees should not discover shortly before expiry that an old issue will prevent renewal.

If the franchisor intends to introduce new standards as renewal conditions, it should clearly identify the applicable version and notification arrangements, rather than adding requirements midway through the assessment. Trade mark use under the franchise agreement must comply with the Trade Marks Ordinance. Conditions involving purchasing, pricing or other restrictions on competition must also be assessed under the Competition Ordinance; signatures from both parties do not automatically make them lawful.

3. Align application deadlines with leases and approvals

A renewal procedure should do more than require an application “before expiry”. Work backwards from the agreement’s expiry date to create a timetable that both parties can meet, covering the franchisor’s reminder, the franchisee’s application, submission of missing information, inspections, remedial action and a written decision.

Each stage should identify who is responsible and what happens if a deadline is missed. Is the franchisor’s reminder simply extra assistance, or is it a required notice that starts the application period? Once the franchisee has submitted all the documents, when must the franchisor respond? Does the assessment period pause if information is missing? These details are more useful than an application date alone.

Pay particular attention to the outlet’s lease. A franchisee may need to commit to renewing the lease before receiving the franchisor’s renewal decision. Conditional approval may be an option, but it must specify the outstanding requirements, how long the approval remains valid and what happens if the lease cannot be secured. This helps prevent a preliminary indication from being mistaken for a final commitment.

The agreement should also address any gap between expiry and signing a new contract. If both parties agree to continue temporarily, they should record the duration, fees and whether the trade mark licence remains in force, and clarify whether this constitutes a formal renewal. Do not leave the relationship uncertain by relying solely on continued collection of management fees or verbal assurances to “carry on as usual”.

4. Clarify renewal fees and the new agreement’s terms early

Renewal does not have to involve a fee, and the initial franchise fee should not simply be charged again without explanation. If a renewal fee applies, specify the amount or calculation method, when it is payable, what it covers and how payments will be handled if the application is rejected or any conditions attached to approval are not met.

Fees can be broken down into items such as application processing, refresher training and the renewed licence. However, avoid unexplained duplication with ongoing management fees. If the amount will be decided later, at least establish an adjustment method and notification procedure so franchisees can assess the total cost of the next term.

A requirement to “sign the franchisor’s then-current agreement” also needs careful handling. A new version may change management fees, support provision or other significant rights. The franchisor should provide the full text and a comparison of the main changes in advance, allowing reasonable time for franchisees to obtain independent legal and financial advice. This is good management practice, not a statutory franchise disclosure period in Hong Kong.

Practical takeaway: Before recruiting franchisees, prepare a one-page renewal checklist covering eligibility, documents, application and response deadlines, fees and responsibility for decisions. Then ask a lawyer to check it against the franchise agreement, item by item. A clear renewal system should allow both parties to understand whether the relationship can continue, and on what terms, before committing resources to the next term.