Leases and Subleases: What to Check Before Joining a Franchise in Japan

Access to premises arranged by the franchisor can be an attractive part of joining a franchise. However, the right to use the brand and the right to occupy the premises are governed by separate contracts. Before joining a franchise network in Japan, understand how subletting from the franchisor works, and check both the risk of losing your trading location and the costs you will actually bear.

First, establish who is renting from whom

The parties and documents you need to check differ depending on whether you rent directly from the property owner or sublet premises that the franchisor has leased. In the latter case, three agreements are involved: the head lease between the landlord, such as the property owner, and the franchisor; the sublease between the franchisor and the franchisee; and the franchise agreement between the franchisor and the franchisee.

Start by listing the parties to each agreement and the premises covered on a single sheet. A company affiliated with the franchisor may be the sublandlord, so cross-check legal company names rather than brand names. Also distinguish between the franchisor merely introducing a property and actually holding the lease.

Before signing, request at least the following:

• A draft sublease and plans showing the premises and equipment included
• The sections of the head lease covering permitted use, subletting, the lease term and termination
• Written evidence that the landlord has consented to the subletting
• Documents setting out restrictions on use of the premises, including fit-out works, signage and opening hours

Article 612 of Japan’s Civil Code generally prohibits tenants from assigning their leasehold rights or subletting leased property without the landlord’s consent. Do not accept an assurance that ‘it is the franchisor’s property, so there is no problem’. Check whether the consent covers occupation by your own company and your intended business activities. Even if the full head lease is not disclosed, ask for alternative supporting documents, such as extracts of key provisions or a letter of consent.

Compare the terms of the franchise and property agreements

The franchise agreement may remain in force beyond the period for which you can use the premises. Compare the start dates, expiry dates, renewal arrangements and termination notice deadlines for the head lease, sublease and franchise agreement side by side to identify any gaps.

Take particular care if the franchisor’s head lease is a fixed-term building lease. Under Article 38 of Japan’s Act on Land and Building Leases, a fixed-term building lease that meets the statutory requirements ends on expiry without renewal. Even if a new lease is possible, there is no automatic guarantee that you will be entitled to one.

Even if you are told that the franchise agreement is renewable, a short remaining term on the head lease could mean having to relocate before you have recouped your investment in the fit-out and equipment. Ask the franchisor:

• If the head lease ends, will the franchise agreement continue, require relocation or terminate?
• Is the franchisor obliged to find alternative premises, or merely to help with the search?
• Who pays relocation costs, fixed costs during closure and reopening costs?
• What payments will the franchisee owe if premises cannot be secured?

The effect on the subtenant and the legal position vary depending on why the head lease ends. Do not assume either that termination by the franchisor always means immediate eviction or that the franchise agreement allows you to stay. Have a lawyer review the full set of contracts.

Compare the total cost of occupying the premises, not just the rent

Comparing brands on the quoted rent alone can give a misleading picture of your actual costs. Separate what is included in your monthly payment to the franchisor from what will be billed separately. The sublease rent need not match the rent payable under the head lease, but a difference between the two is not, in itself, unlawful. What matters is understanding the charges and the services provided before deciding.

Prepare an itemised cost schedule covering sublease rent, service charges, equipment hire, maintenance, guarantee fees and renewal charges. For each item, record the payee, payment date, conditions for price changes and whether tax is included. Check for any overlap with charges under the franchise agreement.

For security deposits and other deposits, establish who holds the money and who is obliged to return it. A deposit paid by the franchisee to the franchisor and a deposit paid by the franchisor to the property owner belong to separate contractual relationships. Do not assume that the owner will refund your deposit directly to you.

When preparing your financial plan, also check when rent starts accruing before opening. If rent remains payable despite delays to building works or licensing procedures, your expenditure during the period with no sales will increase. Put the handover date, start of works, planned opening date and payment commencement dates on the same timeline, and confirm who bears the costs of delays.

Set out repair and reinstatement obligations before handover

Even if the premises come equipped, the franchisor will not necessarily repair equipment when it breaks down. For air conditioning, water supply and drainage, kitchen equipment and similar items, list the owner, the party responsible for arranging repairs and the party responsible for paying. These responsibilities need to be checked against the law and the contract; they cannot be determined simply because equipment is attached to the building.

At handover, use photographs and a written condition record to document whether equipment works, existing damage and any signs of leaks. If you take over equipment installed by a previous occupier, check not only whether it is usable but also whether you inherit an obligation to remove it when you leave.

For reinstatement obligations, clarify what ‘restoring the premises’ means. The work required will differ depending on whether the benchmark is the condition when you moved in or an empty shell with no fit-out. Specific contractual clauses can have a significant effect on commercial premises, so do not estimate these costs on the basis of residential rental experience.

Also watch for clauses in the sublease that pass the franchisor’s obligations under the head lease directly to you. If you cannot see the provisions being referenced, you cannot assess the extent of your liability. Clarify what must be removed, whether specified contractors must be used, how quotations will be reviewed and what rent is payable until the premises have been fully vacated and handed back. Budget for exit costs separately from start-up costs.

Distinguish disclosure rules from your rights as a tenant

Japan does not have a single law imposing uniform disclosure obligations on every franchise. Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business requires franchisors whose operations qualify as a ‘specified chain business’ under the Act to provide prospective franchisees with written information and an explanation before contracting. Whether a business falls within this category depends on statutory criteria, such as the supply of goods and management guidance, rather than the name it uses.

The Japan Fair Trade Commission’s Guidelines Concerning the Franchise System under the Antimonopoly Act also apply beyond retail and food-service businesses. Franchisors and franchisees are independent businesses. Depending on the circumstances, conduct by a franchisor that unfairly disadvantages a franchisee may raise concerns such as abuse of a superior bargaining position. However, unfavourable sublease terms alone do not automatically establish illegality.

Your right to use the premises needs to be assessed separately from pre-contract franchise disclosure, by checking the Civil Code, the Act on Land and Building Leases and the terms of each agreement. Receiving statutory disclosure documents does not mean that consent to subletting has been verified or that the property arrangements are secure.

Practical takeaway: Before signing, summarise the parties, terms, costs and arrangements on termination for all three agreements on one sheet. If gaps or inconsistencies remain, clarify your right to occupy the premises and the obligations you will bear before deciding whether to join.