Franchise Contract Renewal and Non-Renewal in Japan: What to Check Before Joining

When considering a franchise, it is important to look beyond start-up costs and establish how long you can operate and on what terms. Even if you hope to remain part of the franchise network for many years, renewal is not necessarily guaranteed. Before joining, clarify the procedures and costs at the end of the contract, even if you have a good relationship with the franchisor.

1. Distinguish between automatic renewal, renewal by agreement and signing a new contract

Start by checking the contract’s start date, expiry date and the length of any renewal term. In particular, whether the term begins when the contract is signed or when the outlet opens will affect your actual trading period. Also check whether there is a provision to adjust the expiry date if preparations for opening are delayed.

Assess the renewal mechanism by reading the clauses, not simply relying on the label used.

• Automatic renewal: The contract continues unless notice of non-renewal is given by a specified deadline. Check whether the same terms will continue or different terms will apply.
• Renewal by agreement: Both the franchisor and franchisee must agree to renew. The franchisee’s wish to continue does not, on its own, secure renewal.
• Signing a new contract: A new agreement is entered into when the existing one expires. The key question is whether the existing terms carry over or the franchisor’s standard contract at that time applies instead.

Even if you are told that contracts are “normally renewed”, check the approval criteria if the written agreement requires the franchisor’s consent. Do not overlook whether renewal is available only once or whether there is a limit on the number of renewals.

For notices, check the required method as well as the deadline. Establish whether you must submit a prescribed form, whether email is sufficient and whether the notice must reach the franchisor by the deadline. The procedures may also differ depending on whether you wish to renew or not.

2. Clarify renewal assessments and grounds for refusal

If renewal is subject to an assessment, ask the franchisor about the criteria and when the decision will be made. Broad wording such as “where the franchisor considers it appropriate” makes it difficult for a franchisee to judge the likelihood of being able to continue.

Organise your questions under the following headings:

• What will be assessed, and which period of trading will be reviewed
• How late payments or contractual breaches will be treated
• Whether there is an opportunity to address identified issues, and the deadline for doing so
• Which department decides on renewal, and when the decision will be communicated
• Whether reasons will be given for refusal, and whether there is a reconsideration procedure

This does not mean that all these procedures are automatically guaranteed by law. These are points to check in the contract and areas where you should seek specific explanations if the wording is unclear.

For example, if a clause allows renewal to be refused because of a past issue that has already been resolved, ask what circumstances will be taken into account. If trading performance is assessed, check the measures used, the period reviewed and how the effects of the franchisor’s own initiatives will be treated.

Also consider whether the franchisor’s decision comes too late. If you do not know whether you can continue until just before expiry, staffing and cash-flow planning become difficult. Record the application deadline and the franchisor’s response deadline separately.

3. Consider renewal fees and investment recovery over the same timeframe

Knowing whether there is a renewal fee is not enough to establish how much funding you will need to continue. List any charges under other names, such as renewal administration fees or a payment equivalent to an initial franchise fee when signing a new agreement. For each, check the amount or calculation method, payment deadline, treatment of Japanese consumption tax and refund conditions.

If a fee is payable when you apply for renewal, it is especially important to establish what happens if the franchisor refuses the application. Your financial exposure will differ depending on whether the payment is a non-refundable assessment fee or is conditional on renewal being agreed. Even if you are told verbally that renewal is free, check that this matches the fee schedule and contract.

If a new agreement uses updated standard terms, ongoing payments other than renewal fees may also change. Ask when you will receive the new terms and whether you will have time to review them before deciding whether to renew.

Your financial plan should distinguish between at least two scenarios:

• Ceasing to trade at the end of the current contract term
• Securing renewal and trading for a further term

If recovering your initial investment depends on renewal, your plan carries the risk that renewal may not happen. Nor does your obligation to repay borrowing automatically disappear when the franchise agreement ends. Compare the loan repayment period with the contract term, and confirm with your lender how much will remain outstanding at expiry. A plan that assumes renewal is not the same as having renewal secured.

4. Complete your checklist with Japan’s rules in mind

In Japan, Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business requires franchisors in specified chain businesses that meet certain criteria to provide written information and an explanation before a contract is signed. The main pre-contract disclosure items identified by Japan’s Small and Medium Enterprise Agency include the contract term, renewal conditions and termination. However, not every franchise agreement falls within the scope of this Act.

The Japan Fair Trade Commission’s Guidelines Concerning the Franchise System under the Antimonopoly Act are relevant to various types of franchise, not just retail and food service. Franchisors and franchisees are independent businesses, and their dealings are subject to the Antimonopoly Act. Conduct such as using a superior bargaining position to impose unfair disadvantages may raise concerns under the Act.

These rules do not, however, give franchisees an unconditional right to renew. Whether a refusal to renew is legally justified depends on the contract and the circumstances, and must be assessed case by case, including in light of principles such as good faith under Japan’s Civil Code. Avoid assuming either that years of trading guarantee renewal or that the franchisor’s refusal necessarily brings the relationship to an end.

Before joining, cross-check the disclosure documents, draft agreement and renewal fee information, and prepare the following checklist.

Item to check	Details to record
Contract term	Start date, expiry date and renewal term
Renewal procedure	Application deadline, notice method and franchisor’s response deadline
Assessment conditions	Decision criteria, opportunity to remedy issues and whether reasons will be provided
Renewal costs	Calculation method, payment timing and refunds if renewal does not proceed
Changes to terms	When new terms will be provided and which agreement will apply

If the documents conflict, or recovering your investment would be difficult without renewal, consult a lawyer before signing. Keep a written record of explanations about renewal, including the name of the person providing them and the date.

Practical takeaway: Do not join on the assumption that renewal will be available. Summarise the deadlines, assessment requirements and costs on a single page. Having a plan that covers loan repayments and the closure of the business even without renewal provides a sound basis for joining the franchise network with confidence.