Buying a NZ Franchise: Check Bank Security Permissions

A bank’s willingness to lend does not automatically mean your franchise agreement permits the proposed borrowing arrangements. Your lender may want security over business assets, while the franchisor may restrict granting that security or transferring the business if repayments fail. Before buying into New Zealand’s franchise community, check that both parties will accept the same arrangements.

Understand what the bank wants to secure

Security gives a lender rights over specified property if the borrower fails to meet its obligations. It is different from a personal guarantee: security concerns assets, while a guarantee creates a separate promise to meet another party’s obligations.

Ask the lender for its proposed security requirements in writing, rather than relying on an initial indication that finance is available. Establish:

• Which person or company will borrow the money.
• Whether security covers particular assets or broadly covers the business’s present and future personal property.
• Whether the lender expects rights over receivables, stock, equipment or contractual rights.
• Whether any other lender or supplier already claims security over those assets.
• Whether further documents or third-party consents are needed before funds can be released.

In New Zealand, the Personal Property Securities Act 1999 governs security interests in personal property. The Personal Property Securities Register, commonly called the PPSR, is used to register notices of those interests. Registration can affect priority between competing claims; it is not a guarantee that an asset belongs to the borrower.

Have your lawyer explain the proposed security’s scope and arrange appropriate searches. Do not assume that everything used in the business is available to secure your loan.

Match the security to the franchise agreement

Give your franchise lawyer the lender’s requirements alongside the franchise agreement. Ask them to identify provisions restricting mortgages, charges, security interests, assignments or other dealings with the business and its contractual rights.

The key question is not simply whether borrowing is allowed. It is whether the particular security the bank requires is permitted, and whether written franchisor consent is necessary.

For example, a lender might seek security over all the borrower’s business assets. The franchise agreement might require consent before the franchisee grants security affecting its rights under that agreement. Those positions need to be reconciled before you commit to loan documents.

New Zealand has no franchise-specific legislation governing the relationship and no government franchise registration requirement. General laws apply, including contract law, the Contract and Commercial Law Act 2017 and the Fair Trading Act 1986. The latter prohibits misleading or deceptive conduct and certain other unfair trading practices.

Membership of the Franchise Association of New Zealand is voluntary, but members must comply with its franchise code requirements. Those requirements do not replace the need to check your particular borrowing permissions. Neither a brand’s membership nor a lender’s familiarity with it amounts to consent to your transaction.

Clarify what happens if the lender enforces security

The bank may want more than permission to register security. It may seek an agreement with the franchisor setting out what happens if the loan falls into default.

Such arrangements are sometimes documented in a direct agreement between the lender, franchisor and franchisee. They are negotiated protections, not automatic franchisee rights.

Ask your lawyer whether the lender requires provisions covering:

• Notice: whether the franchisor must notify the lender before taking specified action against the franchise agreement.
• Time to respond: whether the lender has an opportunity to remedy a breach, where that is possible.
• Temporary operation: whether a receiver or another approved person could continue operating under the brand.
• Sale approval: how a proposed purchaser would obtain franchisor approval.
• Payment responsibilities: who must pay ongoing franchise fees during any temporary arrangement.

Security over a business does not, by itself, give the lender unrestricted permission to use the brand or install a replacement operator. Equally, franchisor consent to the original loan may not resolve these later questions. Check the wording rather than assuming that one consent covers everything.

Resolve permissions before funds are needed

Build a shared checklist with your lawyer and lender. Record each required consent, who must provide it, any associated legal fees, and when it must be delivered.

Ask whether finance approval remains subject to the bank accepting the franchisor’s documents. A bank can be satisfied with your financial position while still needing acceptable security arrangements before releasing funds.

Allow time for negotiation. If the lender and franchisor cannot agree, discuss alternatives before taking on binding commitments. A different lending structure or narrower security package might be possible, but neither party is obliged to accept it.

Practical takeaway: obtain written alignment between the loan security, franchise agreement and franchisor consents. Treat this as a purchase-stage legal check, not paperwork to finish after signing.