Franchising in the Philippines: Fees During Temporary Closure

Before buying a franchise in the Philippines, ask what happens if an operating outlet has to close temporarily because of flooding, fire, an earthquake or a government order. “We’ll discuss it if it happens” is not a sufficient answer. In franchising, it is important to know which obligations will be suspended, which will continue, and how operations can resume without unexpected debts mounting up.

1. Understand the legal protections—and their limits

The Philippines has no single comprehensive law covering every aspect of franchising. However, specific regulations do exist: Executive Order No. 169 of 2022 sets out protections for micro, small and medium-sized enterprises taking on franchises, including minimum requirements for franchise agreements and their registration with the Department of Trade and Industry (DTI). It is not a blanket guarantee that fees will cease when an outlet closes.

Article 1174 of the Civil Code is relevant to unforeseen or unavoidable events. As a general rule, a party is not liable for such events, unless the law provides otherwise, the parties have agreed otherwise, or the nature of the obligation requires that party to assume the risk.

This does not mean that all debts or fees are automatically cancelled. The event itself, the unfulfilled obligation, the link between the two, and any fault on the part of the party owing the obligation must all be examined. A lack of sales alone does not automatically justify non-payment.

2. Establish when a closure qualifies as unavoidable

Look for the contract clause covering events beyond the parties’ reasonable control. Do not settle for a simple list of disasters. The effect of each event on the outlet’s operations should be clear.

For example, an outlet submerged by flooding is different from one that is safe but inaccessible because the road is closed, or one that remains open but has few customers. A building closure may also be treated differently from a voluntary shutdown because the business is no longer profitable.

Before signing, ask:

• Are power cuts, building damage and evacuation orders covered?
• Is an official order required for a temporary closure to be recognised?
• Who must be notified, how, and within what timeframe?
• What evidence is required: photographs, an incident report or a notice from the building manager?
• What happens if communications are down and notice cannot be sent promptly?

Have a reasonable procedure put in writing for immediate closure when people’s safety is at risk. Safety should not depend on verbal permission alone.

3. Distinguish payment deferral from a genuine fee waiver

Draw up a list of every recurring charge. Include royalties, marketing contributions, IT system fees and any fixed support charges. For each, record the stated policy that applies while the outlet is not operating.

It is important to distinguish between three possible arrangements:

• Suspension: no new charges accrue during the specified period.
• Deferral: fees continue to accrue but are payable later.
• Waiver: a clearly specified amount, or fees for a specified period, no longer needs to be paid.

If royalties are calculated as a percentage of sales, check whether a fixed minimum payment applies. This could leave you with a bill even when there are no sales. If payment is deferred, find out whether interest applies, when payment will fall due, and whether it must be paid alongside the usual monthly obligations once operations resume.

Rent, loans and other services may be governed by separate contracts. A payment extension from the franchisor does not automatically mean an extension from your landlord or lender.

4. Agree the reopening arrangements before signing

The risks do not end when you can open the doors again. Equipment may need to be inspected, damaged stock disposed of, the premises cleaned, or the site approved again.

Clarify who will decide that it is safe to reopen, what documents are required, and who will pay for any necessary inspections. If a visit from the franchisor is required, ask whether there is an additional fee and how quickly the visit can be arranged.

Also check whether the franchise agreement’s term continues to run while the outlet is closed. Do not assume that the term will automatically be extended to make up for months without operations. If there is a maximum permitted closure period, the next steps should be clear, and a documented temporary shutdown should not suddenly be treated as abandonment.

Practical takeaway: Before buying, have a lawyer review a written temporary closure plan covering the grounds for closure, notification, fees and reopening. A clear agreement is more useful than a promise of help once disaster strikes.