Franchise premises: what should you check in the lease?

When expanding a successful business of your own into a franchise network, it is easy to take the premises for granted. Yet your first franchisee may be starting out with a different landlord and very different premises. Even a sound concept can run into trouble if the lease prohibits the necessary alterations, restricts opening hours or leaves the right to install branding uncertain. Check that the premises can legally be used as intended before making irreversible commitments.

1. Separate franchise rights from the right to use the premises

The franchise agreement governs the use of the brand and business system; it does not, by itself, entitle the franchisee to possess or use a particular property. That requires a separate legal basis, such as ownership or a lease. The two agreements need to work together, but neither replaces the other.

Hungary has no separate, comprehensive franchise act. However, Act V of 2013, the Hungarian Civil Code, expressly regulates franchise agreements. General contract rules also apply. For commercial premises, the Civil Code’s lease provisions and the relevant provisions of Act LXXVIII of 1993 also matter. Where premises are owned by a local authority, local regulations must also be checked.

There is no general official registration requirement specifically for franchise systems, nor a separate franchise disclosure act. Nevertheless, the Civil Code’s duties to co-operate and provide information still apply. The European Code of Ethics for Franchising provides a professional and ethical framework; it is neither legislation nor permission to use a property.

First, decide who will be the tenant: the franchisee directly, or the franchisor, which then allows the franchisee to occupy the premises. In the latter case, the franchisor may take on payment and reinstatement obligations that continue even after the franchisee has ceased trading. You must also check whether allowing another party to occupy the premises is permitted and whether the landlord’s consent is required.

2. Translate permitted use into day-to-day operations

“Business use” may be too broad a description for a particular franchise concept. A consultancy office, a beauty business and an outlet preparing food all have different requirements. Draw up a premises checklist based on experience at your existing outlet, then compare it with the lease terms.

At a minimum, obtain documented answers to the following questions:

• Exactly which activities are permitted on the premises, and are any excluded?
• Are the required opening hours, deliveries and waste storage arrangements permitted?
• Can you install business signage, window graphics and other branding?
• Who approves alterations to building services, electrical systems or the interior?
• Who pays to remedy technical shortcomings?
• In what condition must the premises be returned at the end of the lease?

The landlord’s consent does not replace any necessary regulatory procedures, and regulatory approval does not override restrictions in the lease. If the premises are in a condominium building, it is also worth reviewing the relevant provisions of its founding deed and organisational and operating rules.

Do not rely solely on verbal promises from the property agent. Important commitments should appear in the agreement or a clearly identified schedule to it. Nor should the franchisor’s site approval be presented as a comprehensive guarantee of legal or technical suitability if the assessment covered only the commercial location and branding opportunities.

3. Allocate fit-out and handover risks in advance

Premises can generate costs before you are able to welcome customers. Treat signing the lease, taking possession, carrying out alterations and starting rent payments as separate checkpoints. Do not assume that the fit-out period will automatically be rent-free: this must be expressly agreed.

For example, a franchisee might discover only after taking possession that the electrical supply is insufficient for the planned equipment. If the agreed technical condition of the premises is not clearly recorded, disputes can easily arise over who pays for the upgrade and bears the consequences of the delay. The answer is not general reassurance, but a technical survey in advance and a precise allocation of costs.

Record who commissions the work, who is entitled to approve it and how handover will be documented. Distinguish movable equipment from items incorporated into the premises. Clarify the financial arrangements, the right to remove items and the extent of any reinstatement obligations.

Before launch, plan a co-ordinated sequence for entering into commitments. Wherever possible, avoid making substantial investment commitments binding while key conditions for using the premises remain uncertain. Have a lawyer draft suitable contractual conditions; a simple reservation expressed by email may not give you a right to withdraw.

4. Do not promise continuity at a site unless you have secured it

An established trading location can be valuable to a franchise network, but the franchisee’s lease does not automatically transfer to the franchisor or a new franchisee. If retaining the site matters, agree the conditions for a possible change of tenant with the landlord in advance.

A takeover right in the franchise agreement does not, by itself, bind the landlord. Do not leave the necessary consents and any separate agreement until a change becomes urgent. Equally, clarify how branding can be removed without the franchisor entering the premises without authorisation.

Use a short approval checklist recording who the tenant is, what use is permitted, which consents are outstanding, who bears the fit-out risk and who has reviewed the documents. Assign a responsible person and a deadline to every unresolved issue.

Practical takeaway: do not treat your first franchisee’s lease as a standalone property matter. Before it is signed, have it checked to ensure that the terms governing use of the premises genuinely allow the business to operate as the franchise agreement requires.