Buying a Franchise in Malaysia: Align Your Lease and Franchise Agreement

Attractive premises are not necessarily the right fit for your franchise commitments. If your right to use the brand expires while the lease continues, you could still be paying for premises you cannot use as planned. Conversely, losing your premises while the franchise agreement remains in force could disrupt operations. Before entering Malaysia’s franchise market, assess both agreements as part of a single purchase decision, rather than as two separate transactions.

1. Match the franchise term to your right to occupy the premises

Malaysia has specific legislation, the Franchise Act 1998, including amendments made in 2020. Section 25 provides that a franchise term must be at least five years. However, this does not guarantee that you can occupy particular premises for the same period, nor does it mean that the agreement cannot be lawfully terminated.

Your right to occupy the premises depends on a separate tenancy or lease agreement. The Contracts Act 1950 also provides a general legal framework relevant to contractual commitments. Ask a solicitor to review the structure of the premises arrangement, particularly where a registered lease or subletting is involved.

Prepare a schedule listing:

• The start and end dates of the franchise agreement.
• The premises handover date, rent commencement date and target opening date.
• The initial tenancy term and each renewal option.
• The deadlines for giving renewal notices under both contracts.
• Rent review dates and the conditions governing increases.

Do not confuse an opportunity to renew with a right to renew. Wording such as “subject to mutual agreement” may require fresh negotiations. Ask whether you can exercise the renewal option once the conditions are met, or whether the landlord’s consent is still required.

If the initial tenancy term is shorter than the franchise term, make sure you understand the risk that the landlord may not renew it. The franchisor’s approval of the location does not, in itself, resolve that risk.

2. Make location approval a condition before taking on major commitments

Prospective franchisees sometimes pay a deposit on premises first because they fear losing the location to someone else. Problems arise when the franchisor rejects the site, or when the intended use is not permitted by the building owner or local authority.

Before paying, identify all the approvals required. These may include the franchisor’s written consent, permission to use the premises for the intended purpose, approval for alterations and the relevant business licences. The actual requirements vary according to the activity, location and building type.

Ask a solicitor to draft conditions clarifying the following:

• Which approvals must be obtained before the commitment becomes final?
• Who is responsible for applying and paying for them?
• What is the deadline for obtaining approval?
• If approval is not obtained, can you withdraw and recover your deposit?

Do not assume that a tenancy offer letter or reservation form is non-binding simply because the full agreement has not yet been signed. Also check whether the deposit is being paid to the landlord, an agent or another party, and who is obliged to refund it.

Distinguish between the franchisor’s approval and approval from the authorities. The brand’s agreement that a location is suitable does not confirm that all licences will be granted.

3. Calculate the costs if the opening schedule changes

Premises costs extend beyond monthly rent. Prepare a dedicated cost sheet for the period between taking possession of the premises and opening the business. Include utility deposits, maintenance charges, mandatory insurance, fit-out work and building compliance costs.

Check when the rent-free period begins. If it starts when the keys are handed over, delays in plan approvals or equipment installation could use up that period before the work is complete. Also ask whether the exemption covers only the base rent or other charges as well.

Test three scenarios without treating them as forecasts: opening on schedule, a delayed opening and having to change location. For each scenario, record which payments continue and who bears them.

Also check whether the franchise agreement sets an opening deadline. If the landlord causes a delay, can the franchisor grant a written extension? Do not rely on verbal assurances that everyone will be flexible.

If you are using finance for the fit-out, check when repayments begin relative to the opening date. The aim is to identify overlapping premises and financing commitments before sales begin.

4. Establish your exit options before signing

Ask both parties to explain what happens if the location can no longer be used. The tenancy agreement may restrict assignment to a new buyer, while the franchise agreement may require separate approval for transferring the business.

Check the costs of early termination, reinstating the premises to their original condition, removing signage and disposing of brand-specific fixtures and equipment. Also establish whether any personal guarantee remains binding after the business is transferred. Do not assume that selling the outlet automatically releases you from all liabilities.

If relocation may be necessary, seek clarification on the approval process for a new site, the cost of another fit-out and how long operations may be suspended. If the landlord has a right to terminate the tenancy for redevelopment, ask a solicitor to assess the implications for your franchise obligations.

Practical step: before paying a substantial deposit, take your schedule of dates, cost sheet and both draft contracts to your solicitor. Proceed only once you understand how your right to occupy the premises, your obligation to open the outlet and your exit liabilities fit together.