Franchising in Hong Kong: Setting Clear Terms for Initial Deposits, Reservation Fees and Refunds

Businesses preparing to offer franchises in Hong Kong may wish to collect an initial deposit or reservation fee to confirm an applicant’s interest. However, the name given to a payment is no substitute for clear terms. Disputes arise when an applicant believes payment secures the right to open an outlet, while the franchisor sees it merely as the start of an assessment. Building trust across a franchise network starts with explaining what the first payment covers and how it may be refunded.

1. Decide Whether Taking a Payment Is Necessary

An initial deposit should not simply be a tool for filtering out applicants deemed ‘unserious’. Franchisors should first ask: what specific services will be provided after payment, or which recruitment activities will be put on hold? If the next step is only an introductory meeting or sending out brand information, an upfront payment may not be necessary. Nor should an applicant’s financial capacity or commitment be judged solely by their willingness to pay immediately.

Where payment is genuinely necessary, different types of payment should be handled separately:

• Assessment fee: Covers agreed assessment work, with specified deliverables and completion criteria.
• Reservation payment: Covers a reserved opportunity to negotiate for a defined period, clearly stating what is and is not reserved.
• Advance payment towards the franchise fee: Specifies how the payment will be credited later and what happens if no formal agreement is signed.

Avoid using a single ‘good-faith deposit’ to cover every purpose, and do not leave franchise recruitment staff to decide how a payment should be classified. For example, if the franchisor only promises to stop accepting other applications for a particular premises, staff should not verbally suggest that the applicant has secured exclusive rights to an entire territory.

2. Define the Applicant’s Rights in a Separate Document

Hong Kong currently has no legislation specifically regulating franchising, nor any generally applicable franchise registration requirement, statutory pre-contract disclosure regime or franchise cooling-off period. The franchisor eligibility and filing requirements under mainland China’s Regulations on the Administration of Commercial Franchises should not be applied directly to franchise arrangements operating solely in Hong Kong.

That does not mean taking payments falls outside the law. General principles of contract law affect whether the parties have entered into a binding agreement. The Misrepresentation Ordinance may also be relevant where false statements induce someone to pay or sign a contract. Calling a payment a ‘deposit’ does not mean the franchisor can retain it in every circumstance. Whether it can be retained depends on the agreed terms, the substance of the payment and the applicable law.

Before collecting payment, provide a written agreement for the applicant to review. It should cover, at a minimum, the entity receiving the payment, the amount, its purpose, the validity period, the services to be provided and the refund arrangements. It should also clearly state:

• Whether payment means the franchisor has accepted the franchise application;
• Which matters still require agreement, such as the premises or the terms of the formal agreement;
• Whether the franchisor will continue discussions with other applicants during the reservation period;
• Whether the applicant remains unauthorised to use the brand, trade or make commitments on the franchisor’s behalf.

If only some provisions are binding, identify them individually and have the document reviewed by a Hong Kong solicitor. Avoid describing it as a ‘non-binding letter of intent’ while also requiring the applicant to make a non-refundable payment.

3. Base Refund Rules on Why the Deal Does Not Proceed

Refund terms should not simply say ‘all payments are non-refundable’. A more practical approach is to set out the possible outcomes, distinguishing between refundable amounts, work already completed and who must provide supporting evidence.

The franchisor rejects the application: The parties can agree in advance that reservation payments will be refunded. Any separately charged assessment work already completed should be dealt with according to the services and fees specified beforehand. Administrative charges should not be added retrospectively.

The applicant withdraws: Distinguish between work that has not started, work in progress and completed work. If external expenses may be deducted, require the applicant’s prior consent, set a cap and retain invoices or payment records.

Specified conditions are not met: For example, if the premises identified by both parties cannot be secured, explain whether the payment will be refunded, the assessment period extended or alternative premises sought. Do not assume the payment can be held indefinitely, or treat every unsuccessful outcome as a breach by the applicant.

The parties sign the formal agreement: Specify which fee the payment will be credited against, when the credit will be applied and how the formal franchise agreement will carry forward the earlier arrangements, to avoid double charging.

Also set out how to request a refund, the information required, the processing deadline and the payment method. Even the clearest terms will do little to preserve trust if refunds are delayed simply because the franchisor has not completed its internal approval process.

4. Keep Recruitment Statements and Financial Records Consistent

Franchisors should give recruitment and finance staff the same approved payment documents, receipt templates and refund procedures. Receipts must identify the payment category and the corresponding document. Simply describing a payment as a ‘franchise fee’ risks confusion with the fee for formally granting franchise rights. Payments should also go into an authorised company account, rather than being collected through an employee’s personal account.

Keep a simple record for each application, noting the start and end of the reservation period, the work promised, completed tasks, approved expenditure and the outcome of any refund or fee credit. Funds awaiting a final decision should be tracked separately, rather than treating potentially refundable money as revenue freely available to spend. An accounting professional should confirm the appropriate accounting treatment.

In particular, recruitment staff should not use claims such as ‘you must pay today to qualify’ or ‘you can get a refund at any time’ to secure a payment unless the written arrangements genuinely support them. Any extension to a reservation period, change to refund terms or addition of services should be confirmed in writing by both parties.

Practical takeaway: Before taking the first payment, test the documents against four scenarios: rejection by the franchisor, withdrawal by the applicant, unmet conditions and signing the formal agreement. Only start collecting initial deposits when the documents clearly answer, in every scenario, how much will be refunded, what may be deducted and when the payment will be processed.