Application and Franchise Fee Refunds: What to Check Before Joining a Franchise in Japan

When considering a franchise in Japan, you need to check more than the total initial investment. You also need to establish which payments will be refunded if you cannot open. Before paying any application or franchise fees, clarify how the refund terms relate to securing finance, finding premises and obtaining the necessary licences and permits. This will help you make an informed decision about joining the franchise network.

1. Check what the payment is for, not just what it is called

Whether a payment is refundable is not determined simply by calling it an ‘application fee’, ‘reservation fee’ or ‘franchise fee’. First, establish what it pays for, when it is treated as income by the franchisor, and under what conditions it will be refunded.

For example, the questions to ask will differ depending on whether an application fee is credited towards the franchise fee or pays for a survey of a potential site. In the first case, the key issue is what happens if you do not proceed with the franchise. In the second, you should check when the survey begins, what deliverables you will receive, and how the final amount payable will be calculated if the work is stopped.

For each payment, list the following:

• The legal name of the company receiving it, the amount and the payment deadline
• The specific services or rights it pays for
• Whether it will be credited towards another charge, such as the franchise fee
• The circumstances in which it will, and will not, be refunded
• Any costs that may be deducted, how they are calculated and any cap on deductions
• How to request a refund and the deadline for repayment

An application form or reservation agreement may create a payment obligation even before you sign the main franchise agreement. Do not rely on the invoice alone: check the reverse of the application form, any terms you are asked to accept, and all attachments. Payment before the formal agreement does not necessarily mean you are entitled to a full refund.

2. Set separate refund terms for each reason the business might not open

A clause stating that ‘no refund will be given if the applicant withdraws for their own reasons’ may leave it unclear how a rejected loan application or unsuccessful premises application will be treated. Ask separately about voluntary withdrawal and situations where the conditions needed to open cannot be met.

If finance is not obtained, discuss whether loan approval should be a condition for the franchise agreement to take effect, or whether you should have the right to terminate and receive a refund if approval is not obtained by a specified date. You can reduce misunderstandings by agreeing whether approval for less than the requested amount also qualifies, which lenders you must approach, the application deadline and what evidence of rejection is required.

If premises cannot be secured, distinguish between rejection by the landlord, failure to obtain the franchisor’s approval for the premises, and an inability to use the property for the intended purpose. Check the deadline for finding premises and whether you must accept an alternative site. This helps avoid an indefinite wait for a refund on the grounds that you could simply keep looking for another property.

If the necessary licences or permits cannot be obtained, make clear who is responsible for checking the requirements and who will submit the applications. A recommendation from the franchisor does not establish that a property will qualify for regulatory approval. Before signing agreements or commissioning building work, check with the relevant authorities using details of the proposed business and premises.

Also check that the refund clauses cover rejection of your franchise application by the franchisor, or circumstances on the franchisor’s side that prevent it from providing opening support. Setting out the treatment of each scenario in a table can make gaps easier to identify.

3. Do not confuse statutory disclosure with a right to a refund

Japan does not have a system that guarantees refunds of application or franchise fees across all franchise agreements. Whether a refund is due will depend on factors including the contract terms, the explanations given and circumstances of payment, the extent to which obligations have actually been performed, and general legislation such as the Civil Code.

Article 11 of the Small and Medium-sized Retail Business Promotion Act requires franchisors operating a ‘specified chain business’ within the scope of that Act to provide prospective franchisees with prescribed written information and explain it before the agreement is signed. For payments collected when joining, important points to check include the nature of the payment and whether, and on what terms, it is refundable. However, a duty to disclose information is not the same as an automatic right to recover money paid.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act are relevant to a broad range of franchises, not just retail and food service businesses. They identify circumstances in which false or exaggerated disclosures during franchise recruitment may raise issues under the Act. They do not, however, create an automatic entitlement to a full refund whenever an explanation is called into question.

A franchisee is a business operator independent of the franchisor. Even if you apply in your own name, do not assume that consumer cooling-off rights automatically apply to a contract entered into for business purposes. Equally, a ‘non-refundable’ clause does not necessarily mean that a payment can never be challenged. If there are discrepancies in the explanations given, or the franchisor has failed to fulfil its obligations, gather the relevant payment documents and consult a lawyer.

4. Stage payments and agree how unperformed services will be accounted for

In practice, rather than relying on a later dispute over refunds, it is useful to avoid making large payments while there is still considerable uncertainty about whether the business can open. Ask the franchisor whether payments can be split across milestones such as franchise approval, loan approval, securing premises and the start of training.

If a lump-sum payment is required, specify which costs may be deducted if the business does not open. If the explanation is that ‘actual costs will be deducted’, check the work covered, payments to external suppliers, cancellation charges and the basis for calculating those costs. Agree in advance how payments for training not yet provided or goods not yet delivered will be reconciled.

Even if payments to the franchisor are refunded, payments to building contractors, landlords and others may not be. Map out the order in which you will sign the franchise agreement, lease and building contract, and identify when non-recoverable costs begin to arise.

Finally, ensure that the franchisor’s answers are reflected in the application form or a written agreement, and keep these documents with your payment records. Any special terms should identify the payments covered, the grounds for a refund, the notification deadline, how deductions will be calculated and the deadline for repayment. Before signing, have a professional check the provisions governing when the agreement takes effect and when it can be terminated.

The practical priority is to agree in writing, before paying, what must happen for a refund to be due, how much will be returned and when. Do not transfer application or franchise fees without being able to calculate your potential loss if the business cannot open.