Buying a Franchise in the UAE: Who Bears the Cost of Business Interruption?

Your business may have to close temporarily because of a fire, a failure of essential services or an order to close the building, while your financial obligations continue. It is therefore not enough to ask about an outlet’s profits under normal conditions; you should also ask who bears the cost of the days when you cannot trade. In the UAE franchise market, agreeing early on how these risks will be shared helps protect cash flow and reduce disputes when a crisis occurs.

Distinguish between stopping operations and relief from obligations

The UAE has no standalone federal law governing franchising as a distinct contractual relationship, nor a mandatory franchise-specific disclosure regime requiring a standardised pre-sale document. Depending on its nature, the relationship is subject to the general provisions of the Civil Transactions Law and the Commercial Transactions Law, alongside legislation relevant to the business activity.

If the relationship meets the requirements for a commercial agency and is registered with the relevant ministry, Federal Law No. 3 of 2022 Regulating Commercial Agencies also forms part of the legal framework that needs to be reviewed. Provisions on business interruption or termination should therefore not be read in isolation from the contract’s legal status.

In practice, closing an outlet does not automatically cancel royalties or release you from every obligation. The legal treatment may differ depending on whether performance is impossible, difficult or more costly. Nor does every loss or supply crisis amount to force majeure. Ask a UAE lawyer to review the definition of covered events and their effect on each obligation, rather than relying on a general reference to ‘circumstances beyond the parties’ control’.

Test the interruption clause against real-world events

Before choosing a brand, ask for a written explanation of how it handles interruptions at its outlets, then compare this with the draft agreement. Ask existing franchisees what procedures were actually followed, without assuming that any concessions they received will become an entitlement for you.

Test the agreement against specific scenarios:

• The building is closed by an official order, although your premises remain undamaged inside.
• Fire or damage prevents the use of equipment and stock.
• A prolonged electricity or water outage makes operations impossible.
• A failure of the brand’s central system prevents orders from being received.
• An essential item cannot be supplied, making it impossible to deliver the service.

For each scenario, establish who must give notice, what supporting documents are required and when the suspension period begins. Distinguish between an interruption caused by circumstances beyond both parties’ control, one resulting from a breach by either party, and a closure caused by a violation committed by the franchisee. Treating all these situations under a single provision could shift risks onto you that you cannot control.

Also ask for a definition of partial interruption: does offering delivery only count as full continuation of the business? Can opening hours be temporarily reduced with written approval? These details affect fees, performance standards and the timing of the return to operations.

Set out the financial impact in a schedule

Prepare a schedule of every amount payable during a closure, rather than reviewing only the basic franchise fee. Separate sales-based royalties, fixed minimum payments, marketing fees, system subscriptions and any recurring services managed by the franchisor.

A sales-based royalty may fall when revenue stops, but a contractual minimum could leave a payment due. Ask about the distinction between a permanent waiver and a payment deferral: deferral does not remove the debt and could result in a large accumulated payment becoming due as soon as you reopen.

Negotiate a mechanism specifying when relief starts and ends, how fees are calculated during partial operation and how prepaid amounts are treated. If the return to trading is gradual, ask for a repayment schedule that reflects the recovery of the business, rather than making all deferred payments due on reopening day.

Stress-test your cash flow against different interruption scenarios, without treating them as certain forecasts. Include wages, stock protection, equipment repairs and preparations for reopening. Remember that suspending an obligation under the franchise agreement does not automatically suspend your separate obligations to the bank, employees or service providers.

Review insurance and the reopening plan before signing

Having an insurance policy does not guarantee compensation for every interruption. Ask a licensed insurance broker to explain the scope of business interruption cover: does it require insured physical damage to have occurred? What are the exclusions, waiting period, indemnity period and coverage limits? Does the policy cover failures of services outside the premises or closure of the building without internal damage?

Compare the insurance requirements in the franchise agreement with the cover actually available and its cost. Establish who submits a claim, who keeps invoices and records, and how lost revenue and additional expenses are documented. Do not count assumed insurance compensation as guaranteed cash flow before checking the conditions that apply.

Then agree a clear reopening plan: a timeframe for inspecting the site, responsibility for approving repairs, conditions for temporary operation and who authorises the resumption of trading. If the franchisor’s approval is required, ask for a reasonable response deadline so that closure is not prolonged by a process with no time limit.

Address prolonged interruptions too: when will the parties review whether the business should continue? Is there an option for an orderly termination or an agreed extension of the contract? Do not assume that the franchise term will automatically be extended by the number of days the outlet was closed.

Practical takeaway: Before signing, prepare three documents that are consistent with one another: a clause defining the consequences of interruption, a schedule showing fees and cash flow during that period, and an insurance summary explaining what is actually covered. A verbal promise of help in a crisis is no substitute for written rights and procedures.