Buying a Franchise: Align the Franchise Agreement with the Premises Lease

Buying a franchise that operates from rented premises means entering into two separate relationships: one with the franchisor and another with the landlord. The brand owner's approval of a location does not necessarily guarantee that you can use the premises throughout the franchise term. Prospective franchisees need to align both contracts before making substantial payments, so that their right to operate the outlet does not lapse while their payment obligations continue.

1. Map out both contracts and identify who is responsible

Start by checking who is named as the tenant in the lease. Will you rent directly from the building owner, sublet from the franchisor, or simply have permission to use space at a site managed by another party? Each arrangement offers a different level of control and risk.

If the franchisor is the main tenant, ask for evidence that it has the right to let you use the premises. Also check the term of the head lease and the landlord's consent where required. A promise in the franchise agreement that you can use the outlet does not, in itself, bind a building owner who is not a party to that agreement.

Indonesia has specific franchise rules under Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. The regulation requires franchising activities to be based on an agreement in which the parties have equal legal standing and Indonesian law applies. However, a franchise agreement is not a substitute for a premises lease.

The rental relationship is also subject to the provisions on contracts and leases in the Indonesian Civil Code (KUHPerdata). Legal due diligence should therefore cover both documents together, rather than just the brand owner's contract.

2. Match the dates and rights to use the premises

Create a single timeline showing the premises handover date, the start of refurbishment, the date rent becomes payable, the start of the franchise term and the expiry date of each contract. Distinguish between the signing date and the effective date, as these may not be the same.

Imagine that the franchise term is still running, but the lease has expired and the building owner refuses to renew it. You may still have the right to use the brand but no longer have premises from which to operate. Conversely, if your franchise rights expire first, your rent obligations may continue even though the outlet can no longer trade under that brand.

Check the following points side by side:

• A guaranteed period of use: do not confuse a promise to discuss renewal with an agreed right to renew.
• Notice deadlines: make sure you can obtain a decision on continuing the franchise before the lease notice deadline.
• Permitted use: the outlet's activities, signage, refurbishment, opening hours and delivery access must comply with the terms governing the premises.
• Changes in building ownership or management: ask for written clarification of whether your right to use the premises will continue if such a change occurs.

The franchisor's location approval should identify the address and specific premises, including the boundaries of the area you may use. Avoid relying on verbal approval when you are about to incur refurbishment costs.

3. Negotiate a procedure for when you cannot retain the premises

Negotiations should go beyond simply seeking permission to relocate. You need a workable procedure if the lease is not renewed, the building is repossessed in accordance with the contract, or continued use of the premises becomes impossible.

For the franchise agreement, propose a process for submitting a replacement location for approval: the documents required, assessment criteria, response deadlines and a requirement to give reasons for rejection in writing. Also ask whether relocating the outlet attracts an approval fee or requires you to sign a new agreement.

Clarify your obligations during the move. Will recurring fees still be charged while the outlet is not operating? Will the franchise term continue to run? Who will pay to dismantle and reinstall fixtures and equipment? The answers need to form part of a written agreement, rather than resting on an assumption that the franchisor will help.

On the lease side, ask about the possibility of early termination or assignment of the lease if your use of the premises for that brand comes to an end. The building owner is not obliged to accept your commercial proposals; the terms and any consent must be negotiated separately.

Neither relocation rights nor relief from payment obligations arise automatically simply because the other contract has ended. If a three-party agreement is needed, ask a legal adviser to draft a document clearly setting out each party's obligations.

4. Calculate the risk of a mismatch before paying

Prepare a separate cost assessment for a situation in which one contract ends before the other. Include any remaining rent that may still be payable, the cost of reinstating the premises, moving equipment, fitting out a new site and franchise payments that remain due during the interruption to trading.

Separate costs that are fixed under the contracts from those for which you still need quotations. Do not assume that your rental deposit will be returned in full: check the rules on deductions, the required condition of the premises at handover and the deadline for repayment.

Before committing, gather the lease, draft franchise agreement, location approval and any relevant landlord consent documents. Ask a legal adviser to flag conflicting deadlines and obligations that you cannot meet simultaneously. If changes have not yet been agreed, consider postponing non-refundable payments.

The bottom line: do not buy the right to operate an outlet without securing the right to use its premises. Align the dates, permitted use, relocation procedures and payment obligations in both contracts before signing.