Planning Franchise Agreement Renewals in Malaysia

Business owners looking to build a franchise network often focus on the first opening. Yet how the relationship will continue after the initial term also needs to be planned before the first agreement is signed. Unclear renewal arrangements can trigger disputes over new terms, upgrade costs and the right to continue trading. This guide helps prospective franchisors establish a clear, workable renewal process that aligns with Malaysian law.

1. Distinguish the agreement term from registration

Franchising in Malaysia is governed by the Franchise Act 1998 (Act 590), including amendments that came into force on 28 April 2022. Section 25 provides that a franchise term must be at least five years. Do not, therefore, build a model that requires franchisees to renew their entire franchise rights annually as a substitute for this minimum term.

The validity period of a franchise registration and the term of a franchise agreement are two separate matters. Registration involves dealings with the Registrar of Franchises, while the agreement governs the relationship between franchisor and franchisee. Renewing one should not be assumed to renew the other automatically.

Maintain separate records covering:

• The start and end dates of each agreement.
• Relevant notice deadlines and methods of serving notice.
• The validity period of the relevant franchise registration.
• The person responsible for managing each action.

The Act also contains provisions on extending franchise terms. Ask a lawyer to review how these provisions apply before setting renewal rights, grounds for refusal or notice deadlines. Do not assume that expiry gives you unrestricted freedom to end the relationship without considering the legal implications.

2. Define a process, not just a promise of renewal

Wording such as “the agreement may be renewed subject to the franchisor’s consent” is not enough to guide an operations team. Before offering a franchise, map out the application process from receipt of notice through to a written decision.

Section 18 of the Franchise Act 1998 requires franchise agreements to be in writing and to include certain mandatory matters, including terms relating to renewal or extension. Your internal process should therefore support the agreement reviewed by your lawyer, rather than introduce additional conditions that have never been explained to the franchisee.

Organise the process into four stages: receiving the application, gathering information, conducting a joint review and issuing a decision. For each stage, specify who takes action, which documents are required and how communications are recorded.

Also distinguish between extending an existing agreement and signing a new agreement. These may have different documentation and compliance implications. If your renewal structure involves a new agreement, seek advice on any disclosure obligations and registration requirements that may apply; do not assume that an existing relationship removes all formalities.

Prevent staff from promising renewal in conversations or brief messages. All explanations given to prospective franchisees should reflect the written terms and should not present renewal as unconditionally guaranteed.

3. Use evidence-based assessments

Renewal should not depend on a personal relationship with the founder. Develop criteria linked to the franchisee’s ability to continue operating within the franchise system, subject to the rights and obligations under the Act and the agreement.

Matters to assess may include payment status, compliance with contractual obligations, management capability and the condition of assets needed for operations. Use records from across the relationship, rather than relying on a single visit shortly before expiry.

Prepare an assessment file containing evidence, the franchisee’s explanations and follow-up actions. Where there are shortcomings, distinguish between issues that have been resolved and those that remain outstanding. Unverified complaints should not be presented as proven breaches.

Give franchisees an opportunity to correct factual errors in the records. For example, arrears shown in the system may result from a payment that has not yet been matched to the account. A joint review helps prevent decisions based on inaccurate data.

Ensure that commercial staff do not make decisions alone where legal issues arise. A decision not to renew requires a specific legal review; the renewal process is not a shortcut around the protections provided by the Act.

4. Explain reinvestment requirements before a decision is made

Renewal may require equipment replacement, repairs to premises or the adoption of technology systems that remain supported. Explain these requirements early so that franchisees can assess whether they can afford them.

Prepare a schedule of works that distinguishes mandatory requirements from optional improvements. For each item, explain the reason, scope, responsibility for costs and implementation timetable. Avoid broad phrases such as “in line with the latest concept” without explaining what they mean for operations.

If there is a renewal fee, state its contractual basis and what it covers. Avoid imposing fees that were never agreed or describing all upgrade costs as renewal fees. Supplier estimates should also be clearly identified as estimates, not final prices.

Before the renewal decision is signed off, present a written summary covering the proposed term, changes to terms, investment commitments and compliance actions. Allow time for professional review, and do not pressure franchisees into a decision simply because the expiry date is approaching.

Practical action: Before recruiting your first franchisee, prepare a renewal calendar, an assessment form and a summary of investment commitments. Ask a lawyer to review all three alongside the agreement so that renewal becomes a transparent process rather than a rushed negotiation.