Changes to Franchise Terms: Checking the Procedure for Cost Increases Before You Sign

When reviewing a franchise agreement, looking only at the current fee schedule can leave you unprepared for costs after opening. Terms that initially seemed affordable can affect your working capital if recurring fees, payment arrangements or the scope of services change. Prospective franchisees considering the South Korean market should check not only ‘how much will I pay?’ but also ‘what explanation and consultation will take place if the terms change?’ This guide focuses on the contractual procedures for responding to changes in trading terms, rather than whether individual charges are reasonable.

1. Check the agreement for procedures on consulting over changes to trading terms

Franchising in South Korea is governed by the Fair Transactions in Franchise Business Act. Alongside pre-contract safeguards, such as the registration and provision of franchise disclosure documents, the Act specifies what franchise agreements must contain. Under Article 11(2) of the Act and Article 12 of its Enforcement Decree, mandatory provisions include procedures for consultation over changes to trading terms between the franchisor and franchisee, and for resolving disputes.

Do not therefore stop your review simply because the agreement sets out the initial trading terms in detail. Look for who must provide information when proposing a change, what information they must provide and how the parties will exchange views. If these provisions appear in a separate supporting document, check that it forms part of the agreement and obtain a copy.

However, the requirement to include a consultation procedure does not mean that every change requires each franchisee’s individual consent. Equally, a change does not automatically become valid simply because the franchisor has notified you. This depends on the particular clauses, the terms being changed and the applicable law. Remember that notification, consultation and consent are distinct stages.

Standard contract terms prepared by the franchisor also need to be assessed for fairness under South Korea’s Act on the Regulation of Terms and Conditions. Clauses that unfairly disadvantage franchisees may be presumed unfair. However, you should not conclude that a clause is invalid, or that a payment obligation no longer applies, merely because it feels unfavourable.

2. List the terms that can change and their financial impact

Highlight wording in the agreement such as ‘may be changed’, ‘will be notified separately’ or ‘subject to the franchisor’s policy’. Such wording is not necessarily unlawful. However, if the scope and limits of possible changes are unclear, this is a sign that the quotation you have received may not be enough to estimate long-term operating costs.

Your checklist should cover each of the following:

• Subject: What can change: the amount charged, payment frequency, payment method or scope of services?
• Reasons: In what circumstances can a change be proposed, and will its basis be explained?
• Authority: Does the agreement distinguish between changes the franchisor can make and those requiring a separate agreement?
• Procedure: Are the notification method, channel for submitting comments and arrangements for replies specified?
• Implementation: Are there rules on the effective date and the treatment of existing orders or amounts already paid?

Your cash requirements can increase even if the amount charged stays the same. For example, moving from payment in arrears to advance payment means finding the same money earlier. Replacing monthly payments with a lump-sum payment also affects working capital, regardless of the total amount. These are hypothetical examples for reviewing a contract, not cases involving actual brands.

When comparing brands, prepare a table of potential changes alongside the current fee schedule. Consider plausible changes and separately note when extra cash would be needed, which spending you could adjust and which fixed costs would be difficult to reduce. Do not treat uncertain increases as definite costs; use the exercise to assess whether you have sufficient financial headroom.

3. Turn ‘prior consultation’ into a clear procedure

A clause stating that ‘changes will be subject to prior consultation’ tells you little about how that consultation will work. Before signing, ask the franchisor for a sample change notice or an explanation of the procedure. If you receive examples from the past, treat them as evidence of working practices; you still need to check whether your own agreement guarantees the same process.

First, ask whether a change notice will set out the existing and proposed terms, the reason for the change and the intended effective date. For cost increases, it also matters how much detail the franchisor will provide about the calculation. Rather than assuming you can obtain all material containing trade secrets, it is more practical to discuss what information you will need to calculate the impact on your own outlet.

Next, establish a deadline for comments and a designated contact. Consultation may become a mere formality if a change takes effect before you have had a chance to read the notice, or if you must repeat your explanation whenever the person responsible changes. Agree review and response periods suited to the proposed change, but do not mistake a period you propose for a statutory deadline.

During the contract review, consider submitting these questions in writing:

• Who should receive questions and objections about a proposed change?
• How will the franchisor’s replies and the outcome of consultation be documented?
• What rules apply if the proposed effective date arrives before consultation has concluded?
• How will the final changes be incorporated into, or linked to, the existing agreement and fee schedule?

In particular, do not assume that ongoing consultation automatically suspends a change or your payment obligations. It is important to establish in advance how any period without agreement will be handled. If the franchisor says it cannot answer, ask why and what alternative procedure is available before deciding whether to sign.

4. Put a system in place to preserve records before and after changes

After opening, notices, emails and invoices may reach you through different channels. Before signing, confirm which channels will be used for official change notifications and how to update your contact details. Avoiding missed notices is a basic step towards protecting your rights.

Keep records in sequence: the original agreement and accompanying fee schedule, change notices, your written questions, the franchisor’s replies and the final agreement. Distinguish the date each document was received from the date it takes effect. If you receive an oral explanation, summarise your understanding and ask for confirmation, but do not treat the other party’s silence as agreement.

If you cannot resolve a disagreement, first identify exactly what is disputed. Whether the contract gives the franchisor authority to make the change, whether the agreed consultation procedure was followed and whether the change itself is unfair are separate questions. Making these distinctions will help you gather the right documents when seeking professional advice or applying for dispute mediation.

For franchise disputes, you can consider mediation through bodies such as the Franchise Business Transaction Dispute Mediation Council within the Korea Fair Trade Mediation Agency. Missing mandatory contract provisions may provide grounds for a report to the Korea Fair Trade Commission. However, filing a report does not itself secure your preferred trading terms or automatically result in compensation. Before withholding payments on your own initiative, seek advice based on your agreement and the facts of your case.

Action summary: Find the clauses on changes to trading terms and create a one-page summary covering what can change, notification, submission of comments, replies and effective dates. For a sound long-term decision, look beyond low current costs and assess whether the brand explains its reasons for changes and records the outcome of consultation.