Renewing a franchise agreement: what should you agree before buying?

When buying a franchise, it is easy to focus on opening day. Yet your initial agreement may already determine the terms on which you can continue trading after it expires. Belonging to a franchise network does not, in itself, give you an unlimited right to use the brand. If you are planning for the long term, examine the renewal provisions just as carefully as the terms for joining.

1. Do you have a right to renew, or merely an opportunity to negotiate?

The statement ‘the agreement may be renewed’ is not enough on its own. It could mean that you are entitled to continue if you meet specified conditions, or that the franchisor remains free to decide whether to offer you a new agreement. These two arrangements have very different commercial value.

Distinguish between three arrangements:

• Automatic extension: the agreement continues unless either party gives notice to the contrary by a specified deadline.
• Conditional right to renew: you can exercise your right to continue if you meet requirements agreed in advance.
• Continuation subject to a new agreement: the parties must reach agreement again; the current contract does not necessarily guarantee that you can keep trading.

Ask how many renewals are available and how long each renewal term lasts. It also matters whether the right attaches to your current business entity, to you personally or to the particular outlet. Ask for a clear answer on whether a change in ownership affects the ability to renew.

Do not treat ‘we have renewed everyone’s agreement so far’ as a guarantee. It is useful background information, but it is no substitute for a contractual commitment.

2. Understand the Hungarian legal framework

Hungary has no standalone, comprehensive franchise act, but franchise relationships are not unregulated. Sections 6:376–6:381 of Act V of 2013, the Hungarian Civil Code, specifically address franchise agreements. The general rules on the formation, performance, amendment and termination of contracts also apply.

There is no general, automatic right to renew a franchise agreement for a further term once its fixed term expires. Whether you can continue therefore depends primarily on the particular agreement. The requirement to act in good faith and deal fairly is important, but it does not replace an expressly agreed renewal right.

There is no separate franchise registration requirement, nor is there a generally mandatory franchise-specific disclosure document. However, the Civil Code’s duties to co-operate and provide information also apply during contract negotiations: the parties must inform each other of material circumstances affecting the agreement.

The Hungarian Franchise Association’s code of ethics provides a professional framework and also recognises the importance of setting out renewal terms. The code of ethics is not legislation, so expectations arising from it must be considered separately from your enforceable contractual rights.

3. Make renewal conditions measurable

Requirements such as ‘satisfactory operation’ or ‘the franchisor’s satisfaction’ are difficult to assess objectively. Ask for conditions that you can demonstrate you have met through documentary evidence, with an assessment process you understand in advance.

When reviewing the draft agreement, clarify:

• Which outstanding debts or breaches of contract prevent renewal?
• Does a past shortcoming that has already been remedied count against you?
• Which period’s inspection results will be taken into account?
• Will you receive written notice and a reasonable opportunity to put things right?
• Who decides whether you meet the requirements, and on the basis of which documents?

If renewal depends on refurbishing the outlet or completing further training, the scope and deadline should also be clearly ascertainable. It is particularly risky if you must first spend a substantial sum and the franchisor only then decides whether you may continue trading.

Try to negotiate a sequence in which you first receive a written, conditional commitment to renew, and then carry out the agreed investment on that basis. That commitment should also explain what happens if delays on the franchisor’s part prevent you from meeting the conditions.

4. Calculate the cost of the second contract term

Renewal does not necessarily mean continuing the old agreement unchanged. The franchisor may require you to accept its standard agreement in use at the time. This could bring not only new fees, but also different operating requirements and liability provisions.

Before buying, ask for a separate list of potential renewal-related costs: a renewal fee, refurbishment to meet brand standards, equipment replacement, IT migration, repeat training and lost trading during alterations. These are not inevitable costs, but possible contractual requirements that need clarifying.

If the future amount is not yet known, ask for a calculation method agreed in advance, a cap or sufficient advance notice. The phrase ‘on the terms applicable at the time’ does not, by itself, allow you to plan for the commitment.

In your financial plan, distinguish between the initial term secured by the agreement and any assumed continuation. If your investment will only pay for itself following renewal, but the franchisor will not commit to extending the agreement, do not treat renewal as a secure basis for your business plan. Work with an accountant or financial adviser to assess a scenario in which there is no second term.

5. Agree a decision timetable, not just a final deadline

You can easily lose a renewal right if you submit your request late or in the wrong form. The agreement should specify how notice must be given, to whom, by when and how receipt is to be evidenced.

You should not be the only party with a deadline. Ask for deadlines for the franchisor’s response, disclosure of the new terms and notification of any shortcomings. Allow enough time for a legal review of the draft and for your investment decision. Do not assume that the franchisor’s silence amounts to consent unless the contract clearly provides for this.

Where possible, avoid committing to lease and financing obligations while your right to continue using the brand remains uncertain. Clarify separately the legal basis on which you may continue trading if negotiations are still under way when the agreement expires.

Practical takeaway: before signing, prepare a one-page summary setting out when the agreement can be renewed, on what conditions, at what cost and who makes the decision. If any answer is missing, you cannot yet plan confidently for continued trading.