Franchising an Existing Business: Responsibilities for Site Selection and Leases

When turning an existing business into a franchise, it is risky simply to leave franchisees to replicate the site selection that worked for company-owned outlets. A franchisor’s approval of premises does not resolve questions about rent liabilities or permitted use of the building. To maintain trust across the franchise network, decide who will carry out checks, who will sign contracts and when expenditure will be committed—before recruiting franchisees.

1. Separate the franchisor’s site approval from the tenant’s decision

First, decide whether the franchisee will lease the premises directly or the franchisor will lease them and sublet to the franchisee. This determines who negotiates with the landlord, who receives the rent and what procedures apply when the agreement ends. Map out the contractual relationships before deciding how to introduce properties to prospective franchisees.

Where the franchisee leases directly, the basic division of responsibilities is for the franchisor to check compliance with the brand’s location criteria and premises specifications, while the franchisee assesses the lease terms and financial commitments. However, the franchisor cannot simply transfer responsibility for checks or explanations it has specifically undertaken to provide.

Where the franchisor sublets, check the subletting provisions in the head lease and obtain the landlord’s consent. Under Japan’s Civil Code, assigning a lease or subletting generally requires the landlord’s consent. Putting an agreement in place between the franchisor and franchisee does not necessarily resolve the position with the landlord.

A site approval letter should distinguish between matters checked, matters not yet checked and the conditions on which approval depends. Avoid a situation in which a simple statement that a site is ‘approved’ is taken to mean that every necessary check has been completed.

2. Turn experience from company-owned outlets into a site assessment checklist

Translate the founder’s instinct that ‘this location will work’ into checks that franchisees can use. It is important to assess not just floor area or distance from a railway station, but whether the activities required to run the business can actually be carried out there.

The checklist should cover at least the following:

• Building and services: electrical capacity, water supply and drainage, extraction, delivery access, storage space and the condition of existing installations.
• Permitted use and restrictions: the proposed business activities, opening hours, signage, noise and odour restrictions, and use of communal areas.
• Lease terms: costs other than rent, allocation of repair responsibilities, consent for fit-out works, notice periods for termination and reinstatement obligations.
• Decision records: who checked each item, when it was checked, supporting documents, unresolved issues and who is responsible for further enquiries.

For example, even if a kitchen can be installed, the premises may not suit the proposed outlet if the necessary extraction equipment cannot be fitted to an external wall. Do not rely solely on verbal explanations from a property agent. Keep the landlord’s responses, drawings and contractors’ survey findings as distinct records.

At company-owned and pilot outlets, also record what actually caused additional works to become necessary. Feeding those lessons into the checklist creates selection criteria that help prevent problems, rather than merely copying the appearance of a successful outlet.

3. Set conditions for proceeding with contracts and expenditure

Rushing to sign a lease to secure premises can mean rent becomes payable before the franchise agreement or construction arrangements are settled. On the other hand, waiting until every check is complete may mean losing a prospective site. Rather than pressing everyone to move quickly, the franchisor should provide the information needed to make decisions at each stage.

In practice, draw up a process covering stages such as ‘submission of a proposed site’, ‘site inspection’, ‘conditional approval by the franchisor’, ‘confirmation of terms with the landlord’, ‘final decision’ and ‘signing contracts and commissioning works’. This is not a legally prescribed sequence, but an internal control process designed around your approach to opening outlets.

At each stage, check not only what a payment is called, but also the conditions for repayment and who bears the cost of cancellation. If a payment is required with an application, document who receives it, what it will be applied towards and whether it is refundable.

Also ensure that there is an opportunity not to proceed if consent for essential works cannot be obtained or the premises’ services and installations fail to meet the required standards. Any conditions attached to the lease must be agreed with the landlord: the franchisor’s internal rules alone do not create a right to terminate or obtain a refund.

4. Check for mismatches between the franchise agreement and the lease

Japan has no single law that comprehensively regulates franchising alone. Contractual relationships are governed by legislation including the Civil Code, and the application of the Act on Land and Building Leases must also be checked for business premises. The rules on expiry and renewal differ depending on whether the arrangement is an ordinary building lease or a fixed-term building lease.

The franchise agreement and the lease are separate contracts. Ending the franchise agreement does not necessarily end the lease. Equally, losing the use of the premises does not automatically extinguish obligations under the franchise agreement.

Review the two contracts side by side and check the following:

• Are the contract terms, renewal dates and termination notice periods workable together?
• Who will arrange and pay for removing signage and reinstating the premises?
• If relocation becomes necessary, how will franchisor approval and the procedures involving the landlord be handled?
• How will rent, storage charges and construction costs be treated during a delay to opening?

For specified chain businesses covered by Article 11 of Japan’s Small and Medium-sized Retail Business Promotion Act, prescribed information must be provided in writing and explained before the contract is signed. Whether a business falls within scope is assessed against six criteria; describing it as retail or food service is not enough to determine this. Material costs and obligations borne by franchisees when opening an outlet should not be overlooked when checking consistency between contracts or providing pre-contract explanations.

5. Record the reasons for sites specified by the franchisor

If the franchisor recommends a particular building or premises owned by an affiliated company, establish whether prospective franchisees may propose alternatives and how sites will be compared. If the franchisor or a related company will be the landlord, make that relationship clear, along with any costs or obligations beyond rent.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act explain that franchisors and franchisees are independent businesses and that the Act applies to transactions between them. Restrictions necessary for consistent operation are not inherently problematic, but conduct that goes beyond what is necessary and unfairly disadvantages franchisees may raise concerns.

When rejecting a site, do not simply record ‘franchisor’s decision’. Document specific reasons, such as inadequate services or operational obstacles. Where exceptions are allowed, record the additional measures required and who will pay for them.

The first practical step is to create a site assessment checklist, a timetable for contracts and expenditure, and a responsibility matrix as one coordinated set. Before recruiting franchisees, test these against the opening histories of existing outlets and refine the process so that no item is left unchecked.