Buying a franchise: assessing a reservation payment

Before signing a franchise agreement, you may be asked to make a payment to reserve an opportunity or progress your application. In franchising, this commitment should be just as clear as the final agreement. What matters is not what the payment is called, but what you receive in return, for how long and under what conditions you can get your money back.

1. Identify the commitment before transferring money

A ‘reservation payment’ can mean different things: an advance towards a future payment, a fee for preparatory services or a commitment linked to signing an agreement later. Do not assume that all these arrangements receive the same legal treatment.

Ask for a draft of the agreement governing the payment and confirm:

• The identity of the entity receiving the money and taking on the obligations;
• The amount, its tax treatment and the document to be issued;
• Exactly what is being reserved and for how long;
• The obligations that take effect immediately for each party;
• What happens to the money if the final agreement is signed;
• The rules that apply if the deal does not go ahead.

Do not confuse a reservation with final approval of your application. Ask whether internal assessments, approval of the location or other requirements are still outstanding. If the franchisor remains free to reject the project, the document should explain what happens to the payment in that situation.

Also check that the recipient of the bank transfer is the entity named in the agreement. If an intermediary is involved, ask for a written explanation of their role and authority to receive the money.

2. Define what is actually being reserved

The phrase ‘securing the opportunity’ is too vague to justify a payment on its own. You should be able to identify a specific undertaking: for example, temporarily suspending negotiations with other applicants for an identified opportunity, or carrying out a defined preliminary study.

If the reservation is temporary, ask for start and end dates. Clarify whether it expires automatically, whether it can be extended and whether an extension costs extra. A reservation should not be confused with rights that will only arise under the final agreement.

If the payment includes preparatory work, identify the deliverables: a report, a site assessment or another defined service. Ask when you will receive these and whether you can use them if you do not join the franchise network, subject to any confidentiality obligations.

Consider this situation: you pay for the franchisor to assess a location, but the premises become unavailable before the assessment takes place. The agreement should make clear whether you can receive a refund, transfer the assessment to another location or be charged for work already completed. Do not leave the answer to a later decision based on undisclosed criteria.

3. Negotiate the refund conditions

List the reasons why the project might not go ahead. Distinguish between the applicant withdrawing, the franchisor rejecting the proposal and a necessary external condition not being met.

For each situation, record four answers: is a refund available, how much will be refunded, within what timeframe and what supporting evidence is required? Where relevant, include:

• Finance being refused;
• The location not being approved by the franchisor;
• Inability to obtain a necessary permit or authorisation;
• The franchisor withdrawing;
• Failure to agree on the final contract.

These refund conditions are matters for negotiation, not automatic rights attached to every reservation. If finance is essential, seek to make the commitment conditional on approval, specifying the deadline and how any refusal must be evidenced.

If deductions for expenses are proposed, ask for clearly identified categories, supporting evidence and an agreed cap. A generic reference to ‘administrative costs’ does not allow you to work out how much you could recover.

Also confirm whether the amount will be credited towards a later payment and at what point. Avoid accepting a further charge unless you can reconcile it with the money already paid.

4. Understand the agreement under Portuguese law

Portugal has no legislation specifically governing franchise agreements, nor does it require a pre-contractual disclosure document with legally prescribed content or a minimum disclosure period specific to franchising. There is also no dedicated register of franchisors that certifies franchise opportunities.

The general rules of the Portuguese Civil Code apply. Article 227 requires good faith during negotiations and the formation of the contract; Article 762(2) requires good faith in performing obligations and exercising the corresponding rights.

Where standard contract terms are used, Decree-Law No. 446/85 of 25 October, as amended, is relevant, including the duties to communicate terms and provide information under Articles 5 and 6.

Do not assume that the payment legally constitutes a sinal — a deposit with specific consequences under Portuguese law — or that you have an automatic right to withdraw and receive a refund. Its legal classification and consequences depend on the agreement and the circumstances. Have the document reviewed by a lawyer before paying, particularly if it provides for the full amount to be retained or obliges you to enter into a future agreement.

Practical conclusion: only transfer the money once you have written confirmation of what is being reserved, for how long and what happens to the payment in each scenario where the deal does not go ahead.