Buying a franchise: assessing renewal terms

Before buying a franchise in Portugal, find out what happens when the agreement expires. Running a profitable outlet does not, in itself, guarantee that you will be able to continue trading under the brand. Within a franchise network, continuity should rest on clear rules: who decides on renewal, how much notice is required and what conditions apply.

1. Distinguish automatic renewal from fresh negotiations

The phrase ‘renewable agreement’ can conceal very different arrangements. The agreement may renew automatically unless either party objects, give the franchisee an option to renew subject to conditions, or require a new agreement between both parties. In the last case, the opportunity to discuss continuing the relationship is not the same as a right to remain with the brand.

Ask the franchisor to confirm in writing:

• Whether renewal is automatic or requires formal notice;
• Who can prevent renewal and in what circumstances;
• How long the next term will last;
• Whether there is a limit on the number of renewals;
• Whether you will have to sign the brand’s standard agreement in use at that time.

A promise that ‘we normally renew everyone’s agreement’ is no substitute for a clear clause. Also ask whether the existing terms are protected or whether everything will be renegotiated. This distinction helps you assess whether you are buying a genuine opportunity to continue or merely relying on a commercial expectation.

2. Understand the legal framework in Portugal

Portugal has no franchise-specific legislation, dedicated register of franchisors or pre-contractual disclosure document with legally prescribed content. A franchise agreement is an ‘atypical’ contract under Portuguese law, meaning that it is not governed by a specific statutory regime and is subject to the general rules that apply to contracts.

The Portuguese Civil Code establishes freedom of contract in Article 405 and duties of good faith in negotiations and the performance of obligations in Articles 227 and 762. These principles are relevant when assessing the proposed terms and how the parties exercise their rights. However, good faith should not be confused with an automatic guarantee of renewal.

Where standard contract terms have been prepared without individual negotiation, Decree-Law No. 446/85, as amended, also applies. This includes duties to communicate and explain those terms, as well as rules on prohibited clauses. A term is not immune from legal scrutiny simply because it appears in the agreement.

The European Code of Ethics for Franchising is a self-regulatory reference, not Portuguese law. Whether provisions governing agency agreements may apply by analogy depends on the specific issue and legal assessment; this does not justify assuming a general right to renewal. Have the agreement reviewed by a lawyer before relying on the business relationship continuing.

3. Turn vague conditions into verifiable criteria

A clause may make renewal conditional on ‘good performance’ or the ‘brand’s satisfaction’. Without defined criteria, it will be difficult to know in advance whether you meet the requirements.

Ask which requirements will be assessed, what period they cover and which documents will demonstrate compliance. If the decision depends on an assessment by the franchisor, clarify who makes it, when the outcome will be communicated and how any refusal will be justified.

Also confirm the specific costs of renewal. There may be a fee, an obligation to update the outlet’s branding or a requirement to sign up to new services. Do not assume that every brand imposes these costs: ask which apply to the particular offer, including amounts or calculation formulas and payment dates.

If you are required to sign a future agreement, ask which terms could change. Assess the impact of potential changes to fees and other financial commitments, as well as operational obligations. You cannot know all the future terms today, but you can negotiate limits and a process that allows you to make an informed decision.

4. Set a timetable that allows you to decide in good time

Identify separately the agreement’s expiry date, the deadline for requesting renewal and the deadline for giving notice of non-renewal. Confirm the required method of communication, who must receive the notice and how receipt must be proved.

Try to avoid a situation in which you have to commit to substantial expenditure before knowing whether the brand agrees to continue. Where possible, negotiate a written response far enough in advance to assess the new terms and arrange an alternative.

Also check whether other business commitments continue beyond the franchise agreement. Renewing it does not automatically extend your lease, financing arrangements or contracts with third parties; ending it does not necessarily bring those commitments to an end either.

Practical conclusion: before buying, make sure you can answer four questions: do I have a right to renew, what requirements must I meet, how much could it cost and when will I receive a decision? If any answer rests solely on a conversation, ask for it to be clarified in the agreement.