Letters of Intent Before Granting a Franchise in the Philippines

When your business is ready to accept franchise applications, discussions may begin with a letter of intent. However, this should not become a disguised substitute for a franchise agreement. In franchising, it is important to establish whether the document merely expresses interest, authorises an assessment, or creates certain enforceable obligations. Make these distinctions clear before accepting a signature or payment.

1. Define the letter’s purpose

An applicant may submit a letter of intent to introduce themselves, express interest in the business and outline a proposed location. Such a letter need not constitute an agreement at this stage. If you provide a standard form, make sure it does not imply that completing it means the applicant has been approved.

Distinguish between three stages: receiving an application, agreeing to proceed with an assessment, and finally granting the right to operate a franchise. Each has a different meaning and effect.

The document can state that accepting it does not grant the right to use the brand, open an outlet or present oneself as an authorised partner. Also specify that it does not guarantee approval of a location or the allocation of a territory.

Do not rely on the title alone. Even if a document is labelled a ‘letter of intent’, clear promises and acceptance by the parties may have legal consequences. Ask a lawyer to review the actual contents, not just the document’s name.

2. Separate provisional discussions from binding obligations

If your business prepares the letter for both parties to sign, distinguish between provisions that remain provisional and any obligations intended to take immediate effect.

For example, the proposed location and opening date may still be tentative. Meanwhile, responsibility for assessment costs or a prohibition on publicly announcing an unapproved outlet may already need to be clearly established.

Use the following points as a drafting guide:

• Scope of the assessment: What information or visits are needed before a decision can be made?
• Conditions to be met: Are a site assessment, a review of financial capacity and a final agreement still required?
• Expiry date: When will the preliminary arrangement expire if no further steps are taken?
• Withdrawal procedure: Who must be notified of a decision not to proceed, and how?
• Responsibility for costs: Who will pay for travel, assessments or services commissioned independently?

If temporary exclusivity in negotiations is requested, specify its scope and duration. Do not allow a vague sentence to become an indefinite restriction on discussions with other applicants or businesses.

3. Prevent premature payments and irrecoverable costs

Disputes are most likely to arise when money has already changed hands but the parties have different understandings of the application’s status. Before accepting any payment, explain in writing what it covers, whether it will be credited towards subsequent fees, and when it can be refunded or deductions may be made.

Simply calling a payment a ‘reservation fee’ is not enough. What exactly is being reserved: an opportunity to be assessed, a location or the right to negotiate exclusively? If no specific entitlement is being granted, do not give the impression that the applicant has acquired any rights.

Include a clear warning against premature spending. For example, an applicant who has proposed a site should not be encouraged to commission signage or order branded equipment while approval is still pending.

As the business owner, do not send messages such as ‘the outlet is yours’ while the assessment is still under way. The letter, staff explanations and messages sent to the applicant should all be consistent. Designate someone with authority to confirm decisions and keep a record of every change to the proposed terms.

4. Align the letter with applicable law and the next steps

The Philippines has no single comprehensive law covering every aspect of franchising. However, specific rules do apply: Executive Order No. 169, series of 2022, sets out mandatory provisions and registration requirements with the Department of Trade and Industry (DTI) for franchise agreements within its scope involving micro, small and medium-sized enterprises.

Its provisions address matters including fee disclosure, a cooling-off period and dispute resolution. A letter of intent should not be used to bypass these protections. The Civil Code remains important for contract formation and validity, while the Intellectual Property Code is relevant to licensing trademarks and operational know-how.

Before moving to the final agreement, review all earlier commitments. Identify which will be incorporated, replaced or terminated, and how any payments already received will be treated. Give the applicant a complete set of documents that they can have independently reviewed.

Practical reminder: Use a letter of intent to structure the assessment process, not to pre-empt the final agreement. Clarify rights, costs and withdrawal procedures before requesting a signature or payment.