Franchise Premises: Site Selection and Lease Risks

When a franchise network grows out of a successful owner-operated business, its first franchisee’s outlet can easily get off to a poor start if the lease is signed before the site has been properly assessed. An address that appeals to the franchisor may not be financially sustainable for the franchisee, and attractive rent cannot make up for missing technical requirements. Before the search for premises begins, establish a coordinated process for selecting a site and taking on lease commitments.

1. Understand what makes your own location work rather than simply copying it

An existing business may owe part of its success to advantages that cannot be replicated elsewhere. These might include the owner’s local reputation, a rent negotiated years ago or a major employer nearby. Separate these factors from the genuinely transferable strengths of the business model.

Prepare a site requirements checklist based on verifiable criteria rather than general descriptions:

• Demand: who will visit, at what times of day and for what purpose?
• Accessibility: are parking, pedestrian access or step-free access needed?
• Technical suitability: what electrical capacity, water supply, ventilation and storage space are required?
• Visibility: can the proposed shopfront and signage be installed?
• Permitted use: are the intended business activity and opening hours allowed?

Distinguish between deal-breakers and factors that can be weighed up. An internal layout that can be improved is not the same problem as an inability to receive deliveries. Base the requirements on your operating experience, not simply personal taste.

2. Assess the site’s financial viability using the full cost

Rent alone does not tell you whether the franchisee can afford the premises. Request an itemised breakdown of service charges, operating charges, utility billing arrangements, security requirements, maintenance obligations and rent review provisions. In a shopping centre, a contribution to shared marketing may be an additional cost.

Separate the initial investment from ongoing expenditure. A deposit ties up cash even if it is ultimately refundable, while fit-out work may be an investment that cannot be taken elsewhere when the business moves out. Clarify who pays for any necessary increases in utility capacity and what happens to installed fixtures and equipment at the end of the lease.

Prepare base-case, adverse and delayed-opening scenarios together. In the delayed-opening scenario, rent may already be payable while the business has no revenue. The calculations should also include realistic remuneration for the franchisee’s own work and any payments due as part of the franchise network.

Do not approve a site simply because the plan works with optimistic sales assumptions. Check how much of a fall in revenue, and how long an opening delay, the available funds can withstand.

3. Put decision checkpoints before commitments

Assign responsibility for the site search, specify the documents required and establish an approval process. The franchisee should know what information to request, while the franchisor should commit to an agreed response deadline. Without this, pressure from the landlord can easily override a considered assessment.

A practical sequence is:

1. Initial screening based on floor plans, photographs and commercial terms.
2. A site visit and observation of the surrounding area at different times of day.
3. Technical, legal and financial due diligence.
4. A written decision from the franchisor, listing any outstanding conditions.
5. Signing an agreement reviewed by a lawyer, followed by a documented handover of the premises.

Even a letter of intent or reservation agreement may contain payment obligations, exclusivity provisions or other commitments. Do not automatically treat these as paperwork with no consequences.

Written approval should state what it covers: for example, the site’s suitability for the business concept. The franchisor’s approval does not automatically guarantee sales or a return on investment, nor does it replace the necessary specialist checks.

4. Align the lease with the franchise agreement

Hungary has no standalone franchise act, but it would be inaccurate to say that franchise agreements are not specifically regulated under civil law. Act V of 2013, the Hungarian Civil Code, regulates franchise agreements, known in Hungarian as jogbérleti szerződés, in Sections 6:376–6:381. The general rules on contracts and leases must also be considered, alongside the applicable provisions of Act LXXVIII of 1993 where non-residential premises are concerned.

There is no general mandatory franchise register or standard franchise disclosure document prescribed by law. Nevertheless, duties to cooperate and provide information when entering into a contract still apply. The franchisor should therefore not withhold information about known obstacles affecting the site.

When aligning the two agreements, check:

• how long the right to use the premises is secured compared with the term of the franchise relationship;
• the conditions for renewing the lease;
• whether alterations and the installation of brand signage are permitted;
• what happens if a necessary permit or consent cannot be obtained;
• whether another franchisee can take over the lease and what landlord consent would be required.

The franchise agreement does not, by itself, bind the landlord. If the franchisor wants the option of stepping into the franchisee’s position later, this requires an appropriate contractual arrangement agreed with the landlord as well.

5. Make opening a separate approval decision

Site approval is not authorisation to open. Before opening, check that the premises have been handed over, technical works are complete, utilities are in place and the regulatory requirements for the business activity have been met. Allocate responsibilities in writing: what the franchisee must arrange, what the landlord must provide and what the franchisor must check.

Record any outstanding issues, who is responsible for them and the deadlines for resolving them. A scheduled launch is no reason to disregard a safety or legal requirement.

Practical takeaway: secure a documented site decision and coordinated contractual arrangements before making irreversible commitments. This protects both the franchisee’s capital and the credibility of the franchise network.