Franchise Refurbishment Costs: How to Check Your Obligations Before Signing

When choosing a franchise brand, it is easy to scrutinise the fit-out quote for a new outlet while overlooking the possibility of further building work once you are trading. Replacing signage or refurbishing the interior brings more than construction costs: you may also face temporary closure, stock relocation and continuing rent payments. Before joining a franchise network in South Korea, ask not only ‘How much will it cost to open?’ but also ‘When, and on what grounds, can the franchisor require changes to the premises?’ This article focuses on how to assess post-opening refurbishment obligations before signing a franchise agreement.

1. Distinguish between the initial fit-out and later refurbishment

The initial fit-out of a new outlet and alterations to an existing one do not necessarily have the same contractual basis or legal treatment. A franchisor contribution included in your opening quote does not mean that future refurbishment costs will also be supported. Equally, if you are taking over an existing outlet and are asked to carry out work, the assessment will depend on the structure of the transaction and the circumstances of the request.

Look for terms such as ‘premises improvements’, ‘replacement of fixtures and facilities’, ‘brand consistency’ and ‘compliance with the operating manual’ in the franchise agreement. Refurbishment obligations are not always confined to a dedicated clause. A provision requiring franchisees to comply whenever the franchisor changes its operating manual or premises standards may also carry hidden costs.

Add the following questions to your contract review checklist and request answers:

• Must work be carried out after a set period, regardless of the condition of the premises?
• Which elements are covered: signage, walls, flooring or kitchen equipment?
• How is a recommendation from the franchisor distinguished from a mandatory requirement?
• Who decides if there is disagreement over the timing or scope of the work?
• Do the same rules apply to costs arising from changes to the operating manual?

An answer such as ‘We will discuss it depending on the circumstances’ makes spending difficult to forecast. Request documents setting out the applicable criteria, notification arrangements and consultation process. If a representative’s explanation differs from the contract wording, resolve the discrepancy before signing.

2. Check when statutory cost-sharing rules apply

Franchising in South Korea is governed by the Fair Transactions in Franchise Business Act. Article 12-2 prohibits unfair demands for improvements to franchise premises and sets out franchisors’ cost-sharing obligations. Do not assume that every request for work is binding simply because the brand’s design has changed.

The legislation recognises certain legitimate grounds for requiring improvements, including objectively established deterioration of facilities, equipment or interior fittings. Other relevant grounds include hygiene or safety defects that make it difficult to maintain consistency across the franchise network or significantly disrupt normal trading. Whether a particular ground applies must be assessed using evidence and the actual condition of the outlet.

Where the statutory conditions are met, including where the franchisor recommends or requires improvements, the franchisor must contribute the following proportions of eligible costs under the Enforcement Decree:

• Where the work does not involve expanding or relocating the outlet: 20%
• Where the work involves expanding or relocating the outlet: 40%

Do not apply these percentages to your total expenditure without checking eligibility. Cost-sharing covers signage replacement and the interior works specified in the legislation. Items such as replacing equipment and furnishings or simply repairing ageing facilities need to be treated separately. Nor should you assume that losses during closure or financing costs will automatically be reimbursed at the same rate.

There are also exceptions to cost-sharing, including where a franchisee voluntarily undertakes improvements without a recommendation or requirement from the franchisor, or where improvements become unavoidable because hygiene or safety problems arose through the franchisee’s fault. Keep formal notices, emails and photographs showing who proposed the work and why it was needed.

3. Use records to check the brand’s refurbishment practices

Review the franchisee’s financial obligations and operating conditions in the registered franchise disclosure document, then compare them with the premises improvement clauses in the agreement. The disclosure document is an important source of information, but registration does not itself guarantee that every cost provision is fair or appropriate. Obtain any separate works agreement or schedule of premises standards as well.

Ask prospective franchisors for itemised estimates and cost-sharing arrangements from recent refurbishment projects. Rather than requesting documents containing another franchisee’s personal information or commercially confidential details, ask for anonymised examples of the scope of works and final cost allocation. Make clear that these requests are separate from requests for documents the franchisor is legally obliged to provide.

Once you receive the material, compare the breakdown before looking at the total. If signage and interior works are bundled into a single sum, it can be difficult to distinguish costs subject to statutory sharing from items the franchisee must pay separately. Ask how design fees, strip-out work, electrical capacity upgrades, and heating and cooling systems are treated.

It also matters whether you must use a nominated contractor. Check whether you can obtain competing quotes from other contractors, whether design approval carries an additional fee, and who is responsible for defects. The franchisor’s approval is not the same as the contractor’s responsibility to remedy defective work. There should also be a procedure for obtaining your prior consent to additional work.

4. Work out when you need cash, not just how much the work costs

Even if the franchisor contributes towards the bill, you may face a cash-flow gap if you have to pay the contractor first. This is why a promise to contribute and a commitment to pay by a particular date must be checked separately. Read the requirements for supporting documents, when you can submit a claim, the payment method and the contractual settlement terms.

Divide your cash-flow plan into three stages: before work starts, during closure and after reopening. Before work begins, you may need deposits and payments for materials. During closure, rent and staffing-related expenditure may continue. After reopening, you may need funds for stock and promotion. Staffing costs should be assessed separately according to actual working arrangements and employment terms.

Allow for the possibility that the franchisor’s contribution arrives later than expected. If you plan to borrow, do not treat an unapproved loan as secured funding: check when the money will be available and what interest you will pay. It is safer to establish first whether you can meet fixed outgoings without assuming that refurbishment will increase sales.

Make sure the quote states whether VAT is included, how additional work is approved and who is responsible for delays. If you are told that you can remain open during the work, check the actual work areas and safety arrangements. Being able to trade partially does not guarantee normal sales.

5. Document the process and retain evidence before signing

The franchise agreement or a supplementary agreement should ideally specify how the need for improvements will be established, how the scope of works will be discussed, how estimates will be approved, how costs will be shared and how payments will be made. If the franchisor requires work but asks you to sign a ‘voluntary franchisee application’ form, check carefully whether that accurately reflects what happened.

If the agreement ends or the outlet changes operator within a certain period after the work, you may face a requirement to repay part of the franchisor’s contribution. Check both the statutory conditions for repayment and the contract wording. Do not simply accept a statement that all support payments must be repaid in every case.

If disagreements remain unresolved, show both the work request records and the agreement to a qualified franchise transaction adviser in South Korea or a lawyer. If a dispute arises, you can consider the franchise dispute mediation procedure offered by the Korea Fair Trade Mediation Agency. Keep a clear documentary trail linking the date of each request, what was required and your response.

Action summary: Before signing, find the premises improvement clauses and summarise four points on one page: the grounds for requiring work, the scope of works, the costs eligible for sharing and the payment timetable. If any of these remain unclear, do not treat your refurbishment budget as settled. Obtain written answers and any necessary professional advice before deciding whether to join.