Aligning Premises Leases with Franchise Terms in Malaysia

A business that succeeds in its own premises may not be easy to franchise in rented premises. If the right to occupy the outlet expires before the franchise agreement does, the franchisee may still be bound by contractual obligations but have nowhere to operate. Before expanding your franchise network, establish a policy for aligning leases with franchise terms that protects operational continuity without making promises that depend on the landlord’s decisions.

1. Distinguish the franchise term from the right to occupy the premises

In Malaysia, franchising is regulated by the Franchise Act 1998, including amendments made through the Franchise (Amendment) Act 2020, which came into force on 28 April 2022. Section 25 provides that a franchise term must be at least five years.

However, a franchise agreement does not, in itself, grant the right to occupy premises throughout that term. That right must be established through a separate tenancy or lease agreement. Renewing a franchise agreement does not oblige the landlord to renew the tenancy either.

For example, a five-year franchise agreement beginning after the outlet opens may rely on a tenancy that has already been running for several months during fit-out works. Even if both specify five years, their expiry dates may differ.

Prepare a schedule showing:

• The premises handover date and access dates for fit-out works.
• The dates when rent becomes payable and the business opens.
• The start and end dates of the franchise agreement.
• The tenancy expiry date and deadline for giving renewal notice.
• The period allowed for vacating or reinstating the premises.

Ask a lawyer to assess the tenancy or lease structure, including any formalities and registration requirements that may apply depending on its location and duration. Do not assume that one tenancy template is suitable for every Malaysian state and every situation.

2. Decide who rents the premises and who bears the risk

There is a significant difference between a franchisee renting directly from the landlord and a franchisor renting the premises first, then granting the franchisee the right to use them. This choice affects deposits, arrears, control over the premises and what happens when the franchise relationship ends.

If the franchisee is the tenant, the franchisor should establish a site approval process before any commitment is made. Approval should cover operational suitability, not just the address and floor area. Also check whether the permitted use accommodates the actual business activities, opening hours, signage and equipment installation requirements.

If the franchisor is the head tenant, ensure that the tenancy permits the proposed subletting or use by the franchisee. Do not grant rights that the franchisor does not hold. Obtain the landlord’s written consent where required.

Site approval by the franchisor is not a guarantee of profitability or approval by the authorities. Specify who is responsible for obtaining the business premises licence, fit-out approvals and any other relevant permissions.

Also record who bears the costs if a critical application is rejected. This helps prevent disputes after deposits have been paid or contractors appointed.

3. Assess renewal rights before approving a site

The word “renewable” does not necessarily provide adequate protection. Renewal may depend on a fresh agreement, a rent that has yet to be settled or a condition that the tenant has never committed certain breaches.

Before accepting a site, check four points:

1. Certainty of the right: Does the tenant have a clear renewal option, or merely a right to negotiate?
2. Notice procedure: How must notice be served, on whom and by what date?
3. Rent determination: Is there a clear method for setting the new rent if the parties cannot agree?
4. Eligibility conditions: Which breaches could invalidate the renewal option?

Base site approval decisions on documentary evidence, not an agent’s confidence that the landlord usually renews tenancies. If continued occupation remains uncertain, defer approval or secure additional contractual protection first.

Set internal reminders well ahead of the contractual notice deadline. Assign a person responsible for the task and a deputy. Key dates should not sit solely in a branch manager’s inbox.

4. Prepare a workable relocation and closure plan

Even with careful negotiations, premises may become unavailable because of redevelopment, damage or failure to secure a renewal. The franchise agreement should explain the process to follow, rather than simply stating that the franchisee must continue operating.

Set out how to apply for a replacement site, who approves it, what evidence is required and how relocation costs will be shared. Also clarify how royalties, customer orders and operational obligations will be handled during a temporary closure. Do not assume that all payments automatically stop when the outlet closes.

Any right for the franchisor to take over use of the premises requires an appropriate legal structure and the relevant consents; a clause agreed solely between the franchisor and franchisee does not necessarily bind the landlord.

The Franchise Act 1998 also restricts early termination of the franchise relationship. Therefore, do not treat the loss of premises as grounds for automatic termination without a lawyer reviewing the facts, the agreement and the Act’s requirements.

Finally, plan for the removal of signage, the return of equipment and the reinstatement of the premises. Practical action: before approving your first site, complete a schedule of key dates, a list of responsibilities and a written relocation plan. Make sure the right to use the premises genuinely supports the operational commitments in the franchise agreement.