Franchising in the Philippines: Align Your Franchise Agreement and Lease

A site may have the franchisor’s approval but still not be ready for business. If the franchise agreement and lease do not align, you could end up paying before you can open. When investing in a franchise in the Philippines, it is important to review these documents as interconnected commitments—not separate pieces of paperwork.

1. Check who has the right to let the premises

Before signing, establish who actually owns the premises and whether the person you are dealing with has authority to let them. Ask for proof of ownership or authorisation. If the landlord is a company, have the signatory’s authority checked.

If the franchisor is the main tenant and will make the premises available to you, ask to see the relevant provisions of the head lease. Is subletting permitted? Is the building owner’s written consent required? What happens to your outlet if the head lease expires or is breached?

Also check that the permitted use of the premises matches your business. General permission to sell goods is not enough if you need to cook, install an extraction system or use equipment with high electricity requirements.

Distinguish between franchisor approval and government permissions. The former does not replace the necessary premises-use, safety and operating permissions. Confirm the requirements for that specific site with the local government and relevant authorities.

2. Align the dates before committing capital

Create a single schedule of key dates from both contracts. Include:

• The start and end dates of the franchise agreement;
• The start and end dates of the lease;
• Handover of the premises in a condition ready for fitting out;
• Any rent-free fit-out period;
• The required opening date and the start of recurring fees.

The franchise term may begin on the signing date, while the premises are not handed over until several months later. This reduces the time available to earn revenue while the agreement is already running. Rent may also become payable before plans are approved or electricity is connected.

Propose clear conditions that must be met before certain obligations take effect. For example, you could negotiate for rent to start only once the premises have been properly handed over. This is not an automatic entitlement: the parties must agree to it and put it in writing.

Also specify who bears responsibility if opening is delayed. A delay caused by your contractor is different from one caused by the building or by design changes required by the franchisor. Do not rely on verbal promises that the dates will be “sorted out later”.

3. Calculate the true cost of the premises

The cost of a site goes beyond monthly rent. Request a written breakdown of deposits, rent in advance, common-area charges, security, waste disposal, signage and equipment installation. Check whether the quoted amounts include applicable taxes.

If rent is based on a percentage of sales, clarify how sales are calculated. How are discounts, returns and transactions referred from other locations treated? Align this with the method used to calculate franchise royalties so that you do not misjudge how much money will be left over.

Prepare a monthly forecast that separates:

• Pre-opening costs;
• Recurring costs once the business is open;
• Scheduled increases in rent and other charges;
• A cash reserve for possible delays.

If you are borrowing, include the first repayment date even if you will not yet have any sales. Ask the lender about the total charges and the conditions for releasing funds. Do not assume the loan will be enough to cover deposits tied up until the lease ends.

4. Have both contracts reviewed under Philippine law

The Philippines has specific regulations relating to franchising. Executive Order No. 169, series of 2022, sets out safeguards for micro, small and medium-sized enterprises taking on franchises. These include minimum requirements for the contents of agreements, such as fees, rights and obligations, and dispute-resolution mechanisms. It also directs the Department of Trade and Industry (DTI) to establish a registry of agreements covered by the order.

Confirm the applicable procedures and implementing rules with the DTI. Registration does not guarantee profitability or establish that a location is suitable. Nor does the order automatically amend your separate agreement with the landlord.

The Civil Code of the Philippines, Republic Act No. 386, is also relevant to obligations, contracts and leases. Ask a lawyer familiar with these provisions to check for conflicting terms, particularly those concerning use of the premises, alterations to the building and liability if the premises cannot be handed over.

Practical takeaway: Before signing, prepare a one-page comparison of the dates, permissions, fees and liabilities in both contracts. If there are gaps or conflicts, have them clarified in writing before committing your capital.