Franchise agreement renewal: plan for it from the outset

When you turn an existing business into a franchise network, the expiry of the first agreement may seem a distant concern. Yet franchisees are planning for the longer term from the moment they join: fitting out premises, recruiting staff and building a local customer base. That is why the terms for continuing the relationship should not be left until the final year. A well-designed renewal process gives both parties certainty for planning, without promising an unconditional or indefinite relationship.

1. Separate the agreement term from the right to renew

The length of the agreement and the opportunity to continue are two separate decisions. A fixed-term agreement does not, in itself, entitle the franchisee to a further term when it expires. A clause stating that ‘the agreement may be extended by mutual consent’ merely allows for a later agreement; it does not guarantee automatic continuation.

As a new franchisor, you should discuss three options with a lawyer:

• A new agreement is required: before expiry, the parties make a separate decision on whether to continue and on what terms.
• A conditional right to renew: the franchisee can secure the right to continue by meeting predefined requirements and giving notice in the required manner.
• Automatic extension: the relationship continues unless either party gives the appropriate notice within the specified deadline.

These options are not interchangeable. The agreement should make clear which applies, how long the next term will be and whether further extensions are possible. With automatic extension, the form of notice, its recipient and proof of delivery are particularly important.

Consider the agreement term alongside the franchisee’s investment plan. You do not need to guarantee a return on investment. The aim is to avoid a mismatch between an offer built around long-term operation and an agreement that grants only a short, uncertain period in which to operate.

2. Understand the Hungarian legal framework precisely

Hungary has no standalone, comprehensive franchise act, but that does not mean franchise agreements are unregulated. Act V of 2013, the Hungarian Civil Code, expressly recognises franchise agreements. The Civil Code’s general rules on contracts also apply, including duties to co-operate and provide information, and the requirement to act in good faith and deal fairly.

There is no general requirement for franchise systems to register with a public authority, nor is there a mandatory franchise disclosure document prescribed by specific legislation. This does not, however, remove the duty to disclose material circumstances. If continuation is conditional, the franchisee needs to understand that before deciding to join.

The European Code of Ethics for Franchising is a self-regulatory standard, not Hungarian legislation. It may be relevant through association membership or contractual commitments, but it is no substitute for checking the applicable law. The terms of a renewed agreement must also take account of Hungarian and EU competition law requirements.

Renewal is not simply an administrative exercise: signing a new agreement and amending an existing one may have different legal consequences. Rather than asking your lawyer for a single ‘extension clause’, give them the full decision-making process and the conditions you intend to apply.

3. Set verifiable conditions

Wording such as ‘renewable subject to the franchisor’s satisfaction’ offers little guidance. Instead, choose conditions whose fulfilment can be established from documents and which the franchisee can understand in advance.

Examples include settling overdue, undisputed fees, remedying material breaches of contract or retaining the licences and authorisations needed to operate. Also specify the period over which performance will be assessed, who will carry out the assessment and how the franchisee can flag any errors.

Distinguish shortcomings that can be remedied from circumstances that rule out continuation. A missing document that can be supplied should not have the same consequences as a serious, repeated breach of contract. Where missing information can be provided or corrective action taken, set a deadline and a verifiable way of confirming completion.

Clarify in advance how the commercial terms for the new period will be determined. Will there be a separate renewal fee? Could recurring fees change? When will the franchisee receive the new terms? You do not need to fix every future amount years ahead, but you should establish how decisions will be made and communicated.

Avoid clauses that create open-ended uncertainty by allowing the franchisee to continue only on terms that head office will devise later, with no parameters set in advance. If you intend to use your then-current standard agreement, explain what that means and its limits in the original agreement.

4. Build a timetable by working backwards from expiry

Plan backwards from the expiry date. The preparation time needed will depend on the business: the premises lease, financing, any refurbishment and seasonal trading patterns all matter. Do not set a decision deadline so late that no meaningful choice remains.

Your internal timetable should include at least the following:

1. Head office notifies the franchisee of the approaching expiry date and the next steps.
2. The franchisee gives notice of their intention to continue.
3. Compliance with the conditions is assessed, and any missing information or shortcomings are addressed.
4. The franchisee receives the full draft agreement and commercial terms.
5. The parties make their decision and record it in writing.

Assign responsibility to someone at head office and keep records of deliveries, notices and the approved version of the agreement. Do not leave operations after expiry to unspoken assumptions: make clear, in good time, the legal basis on which the relationship may continue.

Practical takeaway: before signing your first franchisee, draw up a one-page renewal process. If it clearly sets out who decides, when and on what conditions, your lawyer can turn a workable business process into contractual terms.