Franchise Refurbishment Costs in South Korea: Check Your Obligations and Rights Before Signing

When choosing a brand, it is easy to scrutinise the fit-out quote for a new outlet while overlooking the possibility of further building work during trading. A consistent appearance matters across a franchise network, but franchisees do not always have to bear the cost alone. Before signing, distinguish between the initial fit-out and improvements to an operating outlet, and check everything from the grounds for requiring refurbishment to cost-sharing and losses during closure.

1. Distinguish the initial fit-out from refurbishment during trading

Start by asking what the franchisor means by ‘refurbishment’. Replacing signs, repairing walls and floors, changing the seating layout, extending the kitchen and replacing equipment may all be bundled into one quote. Yet each task may differ in necessity and in whether it qualifies for statutory cost-sharing. A single total will not tell you how much you will actually have to pay.

South Korea’s Fair Transactions in Franchise Business Act defines improvements to franchise premises as replacing existing facilities, equipment, interiors and similar items with those of a new design or quality. The starting point for your review is not to treat the cost of opening an outlet and the cost of changing an operating outlet as subject to identical conditions.

Look for and highlight contract terms such as ‘compliance with brand standards’, ‘maintenance of facilities’ and ‘periodic refurbishment’. Ask whether these mean routine cleaning and repairs, or require the replacement of facilities that are still in good condition. Broad wording such as ‘to be carried out immediately at the franchisor’s request’ needs more specific provisions on the grounds for a request and the procedure for allocating costs.

When comparing brands, add the conditions for improvements during trading alongside the initial fit-out cost. You can ask for anonymised examples of recent refurbishments, covering the scope of work, the reasons for requiring it and the amount paid by the franchisee. This is a due diligence request to help assess long-term operating costs, not a suggestion that you have a legal right to all internal records.

2. Check the grounds on which the franchisor can require work

Article 12-2 of the Act prohibits unfairly compelling franchisees to improve their premises. The statutory grounds include objectively established deterioration of facilities, equipment or interiors, and hygiene or safety defects that make it difficult to maintain consistency across the franchise network or significantly disrupt normal trading.

A franchisor saying ‘we have introduced a new design’ or ‘other outlets have already changed’ does not, by itself, establish that you must carry out the work. Conversely, even if facilities seem usable to you, confirmed safety defects mean the need for improvements must be assessed. What matters is the actual condition and supporting grounds, not the label given to the request.

Before signing, obtain the franchisor’s answers to these questions:

• Who assesses deterioration, and what evidence do they use?
• Will the franchisee receive the site inspection findings and a list of items requiring replacement?
• Will a full refurbishment be required even where partial repairs would resolve the problem?
• Is there a procedure for challenging the necessity or scope of the work?

A contract clause requiring refurbishment at set intervals does not remove statutory restrictions. Review the description of the work as ‘periodic refurbishment’ separately from whether requiring it is lawful. Cross-check answers given during initial discussions against the contract itself.

3. Separate eligible costs rather than relying on the total quote

The Act requires franchisors to contribute towards certain costs of premises improvements carried out at their recommendation or request. Under the Enforcement Decree, the franchisor’s contribution is 20% where the work does not involve extending or relocating the outlet, and 40% where it does. These percentages do not, however, apply automatically to every item in the quote.

Statutory cost-sharing covers specified categories, including sign replacement and interior refurbishment work. Within interior refurbishment costs, items such as replacement equipment and furnishings, and additional work chosen by the franchisee that is unrelated to network consistency, must be identified separately. If the quote simply states ‘outlet improvements — lump sum’, ask for an itemised version.

A cost schedule structured as follows can make discussions clearer:

• Work required by the franchisor: written request, work items, reasons for the work and quoted amounts
• Work added by the franchisee: reasons for the additions, whether they are optional and separately quoted amounts
• Equipment and furnishings replacement: items to be purchased, reasons for replacement and separation from building work costs
• Cost-sharing calculation: eligible amount, applicable percentage and each party’s contribution

Statutory exceptions may apply to improvements undertaken voluntarily by the franchisee or hygiene and safety problems attributable to the franchisee. If the franchisor has in fact required the work but the application describes it as a ‘voluntary franchisee request’, have this corrected before signing. Also confirm in writing how any separate grant or discount relates to the statutory contribution.

4. Calculate cash requirements beyond the building work

Even where the franchisor pays part of the refurbishment cost, this does not automatically compensate you for lost revenue during closure. Budget separately for rent and wages during closure, dealing with stock, cleaning and preparing to reopen. It is also worth considering whether work can be carried out in stages while the outlet continues trading.

The timing of the franchisor’s payment matters too. If you must pay the contractor first and then claim reimbursement, you may temporarily need more cash than your final share of the cost. Put the contractor’s deposit and final payment dates, the evidence required by the franchisor and the contribution payment process on the same schedule.

Consider both the expected construction timetable and arrangements for delays. Agree who will communicate if material shortages or additional repairs extend the schedule, who can authorise extra work and how its cost will be determined. Identify the contracting parties and the party responsible for remedying defects, so the contractor and franchisor cannot simply pass responsibility between them.

Test your financial plan against a delayed contribution payment or a longer construction period. If you would then struggle to cover rent and wages, reassess your working capital requirements while you are still choosing a brand. A low opening quote does not necessarily mean low long-term costs.

5. Keep records from the initial request through to final settlement

Before signing, obtain and retain the premises improvement clauses, cost-sharing rules and request and consultation procedures together. When an actual improvement request arrives, confirm the request date, reasons, items covered and proposed implementation date in writing. Secure photographs of the premises and inspection records before work begins.

Apply the same principle to revised quotes and additional work. If work proceeds on verbal approval alone, disputes can later arise over who requested it and whether it qualifies for statutory cost-sharing. Organise the final quote, works contract, tax invoices, payment records and completion photographs so they can be cross-referenced.

If you disagree over the scope of cost-sharing or whether the work is being unfairly imposed, take the relevant clauses and evidence to a qualified Korean franchise transaction adviser or solicitor for review. If the matter remains unresolved, consider the franchise transaction dispute mediation process. Seek advice separately on the statutory contribution and any additional claim for losses during closure, as their legal grounds and assessment may differ.

Action summary: Before signing, prepare a one-page summary answering three questions: ‘When and why must improvements be made?’, ‘Who pays for which costs?’ and ‘How much cash will I need during the work?’ If the answers or calculations are unclear, obtain written clarification before deciding whether the business is viable over the long term.