Franchising in Portugal: setting the terms for reservation payments

When preparing to expand a business, you may encounter a prospective franchisee willing to pay to reserve a location or an opportunity. Before accepting, the prospective franchisor should clarify exactly what they are promising. In a franchise community built on trust, a reservation payment should not replace assessment of the application or bring forward commitments that have yet to be defined.

1. Decide whether the reservation serves a specific purpose

A reservation is not a compulsory step in developing a franchise network. It only makes sense when it addresses an identifiable need: for example, temporarily suspending negotiations with other candidates for a defined territory while the conditions needed for the project are checked.

If the aim is simply to demonstrate interest, a written expression of interest without payment may be enough. Accepting money creates additional obligations, expectations and administrative work; it should not be used as a shortcut to securing a candidate's commitment.

Before proposing a reservation, answer these questions in writing:

• What is being reserved: a territory, a location or simply priority in negotiations?
• How long will that commitment last?
• What checks and other steps must each party undertake during that period?
• What events will allow the reservation to proceed to the next stage, be extended or end?

Avoid promising an outlet ready to open when essential checks are still outstanding. Reserving an opportunity does not guarantee that the candidate will find suitable premises, obtain finance or be able to start trading.

2. Ensure the agreement fits within Portuguese law

Portugal has no specific franchising legislation and no compulsory register of franchisors as such. Nor is there a pre-contractual disclosure document with a legally prescribed format and timetable specific to franchising. This does not mean that negotiations are unregulated.

Article 405 of the Portuguese Civil Code establishes freedom of contract, while Article 227 requires good faith in the negotiation and formation of contracts. Article 762 also provides for good faith in the performance of obligations. Information relevant to a decision to make a reservation must therefore be accurate and sufficiently clear, even if the franchise agreement is still being drafted.

Depending on the agreement's content, the rules on standard contract terms, established by Decree-Law No. 446/85, and Portuguese and EU competition rules also apply. The legal requirements governing the particular business activity remain applicable too. The European Code of Ethics for Franchising is a self-regulatory reference, not Portuguese legislation that applies universally.

The name given to a payment does not determine its legal nature. A sum described as a ‘reservation payment’ may need to be assessed as an advance payment, payment for a specific commitment or a deposit with particular legal consequences under Portuguese law (sinal), depending on the agreement and the circumstances. Do not use these terms interchangeably: seek a legal review before accepting any money.

3. Define how the money will be treated and when refunds apply

The agreement should identify who receives the payment, what it is for and how it will be treated if the final franchise agreement is signed. If it will be credited towards the initial franchise fee, state this expressly and avoid presenting the same amount as two separate charges.

Prepare a simple list of scenarios with clear consequences:

• The franchisor rejects the application: specify what happens to the money and the deadline for any refund.
• The candidate withdraws: clarify whether any money will be retained, on what grounds and how the amount will be calculated.
• An agreed condition is not met: determine what happens if, for example, finance expressly required as a condition is not obtained.
• The reservation period ends without a decision: state whether the reservation expires or can be extended by written agreement.
• The proposed terms change: set out what happens if the franchisor presents terms that differ materially from those initially communicated.

A clause allowing the whole payment to be retained automatically, whatever the reason for the project not proceeding, may raise legal issues. Its validity depends on the specific legal context and circumstances, not simply on the candidate's signature.

Also agree with your accountant how receipt of the payment should be documented, whether an invoice is required and how it should be treated for tax purposes. Do not assume that calling the money a ‘deposit’ removes tax obligations.

4. Separate the reservation from permission to operate

The document should clarify which rights apply during the reservation period. In particular, it should not imply permission to use the brand, announce a confirmed opening or present oneself as a franchisee if those rights have not yet been granted.

Create a short internal process covering approval of the agreement, confirmation of receipt of payment, recording the expiry date and assigning responsibility for follow-up. No employee should verbally promise refund terms that differ from those documented.

At the end of the process, confirm the outcome in writing: progression to the final agreement, an extension or termination of the reservation. Record the corresponding financial settlement too, rather than leaving payments unresolved simply through lack of follow-up.

In practice: before charging a reservation payment, make sure you can explain on one page what you are promising, for how long, what the money is for and when it will be refunded. If these answers are still ambiguous, continue negotiations without accepting payment.