Leases and Contracts Before Franchising Your Business

Your product, brand and business systems may be ready, but one agreement could still bring a new outlet to a halt: the lease on its premises. Before offering a franchise, make sure the franchise agreement and lease do not conflict. In franchising, it is essential to establish who has the right to use the premises, who pays, and what happens when either agreement ends.

1. Establish who will be the tenant and who will be liable

The brand owner does not automatically have to be the tenant. The franchisee may enter into a lease directly with the landlord. Alternatively, the brand owner may be the main tenant and allow the franchisee to use the premises, provided the agreement and the law permit this.

These arrangements carry different risks. If you are the main tenant, you may remain liable for rent even after the franchisee stops trading. If the franchisee is the tenant, you cannot simply enter the premises, continue operating or appoint a replacement when problems arise.

Before choosing an arrangement, draw up a list of responsibilities:

• Who will pay the deposit and rent in advance?
• Who will cover repairs, common-area charges and service charges?
• Whose name will the electricity, water and other utility accounts be in?
• Who owns the equipment installed at the premises?
• Who will deal with the landlord if there is a breach?

Recording the answers in the franchise agreement alone is not enough. They must also be reflected in the lease where the landlord’s rights are affected.

2. Align the dates and permissions

Compare the lease start and end dates with the franchise term. If the lease is shorter, the franchisee could lose the premises while still owing obligations to you. If it is longer, they could remain liable for rent after their right to use the brand has ended.

The dates do not all have to match, but there should be a clear plan for any gap. Your review should account for the time needed to fit out the premises, obtain permits, take delivery of equipment and prepare for opening.

Also check whether the lease permits the activities you will actually carry out. For example, permission to operate a shop should not be assumed to cover cooking, installing ventilation or accepting late-night deliveries.

List the permissions that need to be in writing: signage, internal alterations, additional electrical load, opening hours and use of space for storage. If the landlord’s consent is required, a promise from your expansion team is no substitute.

Set a date to check whether the conditions have been met before committing to substantial expenditure. Clarify which payments are refundable and which cover services already provided.

3. Have both agreements reviewed together

The Philippines has no single comprehensive law governing every aspect of franchising. However, specific regulation does exist: Executive Order No. 169, series of 2022, establishes safeguards for micro, small and medium-sized enterprises taking on franchises. These include minimum requirements for agreements within its scope and registration of agreements with the Department of Trade and Industry (DTI). Have an adviser check whether your arrangement falls within its scope and which procedures apply.

The Civil Code also applies to obligations, contracts and leases. Intellectual property law is relevant to permission to use the brand. Republic Act No. 9178 concerns barangay micro business enterprises, a category of small community-based businesses; it is not a franchising law.

Give your lawyer both agreements, along with any attached building rules. Ask them to pay particular attention to assignment of the lease, subletting, access to the premises and removal of signage. A right granted to you by the franchisee may not be enforceable against the landlord without the landlord’s consent.

4. Plan the exit before opening

Set out a written procedure for closing or relocating the outlet. Keep obligations relating to the brand separate from those relating to the premises: ending the franchise does not automatically end the lease.

It should be clear who will remove the signage, collect the equipment, return the keys and restore the premises to the required condition. Also record how any returned deposit will be divided after legitimate charges have been deducted.

Before offering the franchise, prepare a one-page comparison of the two agreements covering the parties, dates, permissions, responsibilities and exit arrangements. Practical reminder: do not let the franchise agreement promise rights that the lease does not grant.