Buying a Franchise in the UAE: Managing Late Payment Interest

Franchise fees may look affordable, but the cost of paying them late can be hidden in a short clause. When buying a franchise in the UAE, do not review the fees alone; check what happens if a bank transfer is delayed or you dispute an invoice with the franchisor. Clear terms help maintain a stable relationship within the franchise network and protect your cash flow from liabilities that may not appear in the initial sales offer.

Separate late payment costs from the original fees

Start by gathering all provisions relating to late payment, even if they appear in different schedules. The agreement may include late payment interest, an administration fee, collection costs and legal recovery expenses. Do not assume these are alternatives to one another; ask explicitly whether they can all be claimed together and what documentation is required to substantiate each cost.

The standard restaurant franchise agreement template published by the Ministry of Economy and Tourism includes wording for interest linked to a bank base rate, calculated daily and compounded monthly. Its inclusion in a template does not mean it is mandatory or enforceable in every detail in every case; the template itself calls for specialist legal advice before use.

Compounding means adding accrued interest to the balance on which future interest is calculated. It therefore produces a different result from charging simple interest on the principal alone. Ask the franchisor for a written worked example showing an overdue invoice, the date from which interest starts to accrue, the interest, the charges and the final balance. Then have your accountant and lawyer review it.

Prepare a table for each potential amount payable, covering:

• The type of obligation: a royalty, marketing contribution or supply invoice.
• The basis for calculating late payment costs and the date they start to accrue.
• Whether the rate is fixed or linked to a variable benchmark.
• Any additional charges, their limits and the documents needed to substantiate them.

Understand the legal framework before accepting the wording

The UAE has no standalone, comprehensive federal franchise law requiring a standard pre-contract disclosure document or establishing a specific regime for late payment interest in franchise agreements. Depending on its nature, the relationship is governed by the general rules of the Civil Transactions Law, Federal Decree-Law No. 50 of 2022 issuing the Commercial Transactions Law, and other relevant legislation.

The Commercial Transactions Law addresses interest and delays in meeting commercial payment obligations. However, assessing a particular clause requires identifying the nature of the debt, the calculation method and the relevant mandatory rules. Do not assume that every provision agreed by the parties is automatically enforceable, particularly where it involves compound interest or additional compensation.

Federal Law No. 3 of 2022 regulating commercial agencies may also apply if the relationship meets its applicability and registration requirements. Not every agreement labelled a ‘franchise’ is a registered commercial agency, and the agreement’s title alone does not determine its legal status.

Ask a lawyer licensed in the UAE to review the clause in light of the applicable law and the nature and location of the business. The aim is not to obtain a general assurance that ‘interest is permitted’, but to establish which amounts can be claimed, how they should be calculated and what needs changing before you sign.

Define when a payment actually becomes overdue

Many disputes begin with the due date, not the interest rate. Does the payment period run from the date the invoice is issued or received? Does the amount need to be supported by an approved sales statement? What happens if the invoice is sent to an unauthorised email address or contains a calculation error?

Negotiate a clear procedure for delivering invoices, with a designated correspondence address and a named person responsible for receiving them. Specify how holidays, bank transfer processing times and intermediary bank charges will be handled. Also distinguish between the date a payment instruction is issued and the date the funds reach the franchisor’s account, as that difference may determine whether a payment is considered late.

If interest is linked to a bank rate, the agreement should identify the bank, the benchmark, how it can be verified and how often it changes, with a fallback mechanism if publication ceases. The phrase ‘the bank’s prevailing rate’ alone does not give you a clear basis for forecasting the cost.

Also request a regular account statement showing the principal amount of each debt, payments received and how those payments have been allocated. Applying your payment to charges and interest first may leave the principal outstanding, with further amounts continuing to accrue on it. This mechanism should be understood and agreed in advance.

Protect your ability to dispute invoices and test the cash flow impact

Propose a written invoice dispute procedure covering the deadline for raising a dispute, supporting documents, the person responsible for reviewing it and a response deadline. One option to negotiate is to pay the undisputed portion on time while suspending late payment costs on the disputed portion until it is resolved through the agreed procedure. This is a proposed contractual arrangement, not an automatic right under every agreement.

Test the clause against three scenarios: a short banking delay, an invoice that needs correcting and a cash flow squeeze lasting into the next collection cycle. In each case, calculate the total amount payable, not just the interest. If you intend to use a bank facility to make the payment, compare its cost with the cost of paying late, without assuming borrowing is the best solution.

Practical takeaway: Do not sign until you can calculate the cost of late payment yourself. Pin down the due date, interest benchmark, payment allocation rules and dispute procedure, then obtain a legal review of the final wording.