Franchisors need to think through redecoration and fit-out obligations

Andrew Grima

Can a franchisor compel franchisees to pay for costly store fit outs and renovations of stores? This has been the subject of some discussion in the media lately.

So the big question is, what is the process around fit out of premises and who is responsible – the franchisor or the franchisee?

Check your franchising agreement

Branding is an important part of establishing a consistent look, feel and above all, customer experience. Franchise agreements will commonly reflect the importance of branding, stipulating that franchisees undertake necessary work to align with any changes in branding. 

Many franchise agreements, particularly for those in newly leased premises, set out the expectations around fit out. It is important, as a franchisor to set out what contributions will be expected from both the franchisor and, if required, the costs for the franchisee.

Once a tenancy ends, there can also be costs as most premises need to be returned to their original state. Again, it should be made clear to franchisees if they’re under a licence or a sublease whether they’re responsible for such make good costs.

Revamping an existing fit out can also typically be a condition upon renewal of the franchise agreement.

We see this issue come up when franchisees haven't upgraded their premises for many years, so that a fit-out is out of date and not in line with a franchisor’s current standards. 

Often, franchisors are also obligated under their leases to carry out an upgrade of the premises and a make good at the end of the lease and so if they require their franchisee to comply with these obligations, they need to ensure that the sublease or licence passes on these obligations.  

What could complicate the situation?

An additional complexity is the introduction of changes to the Franchising Code of Conduct (Code) which came into effect in January of last year. Under these changes, it may be possible that new laws on unfair contract terms may come into play.

The changes also set out that a franchisor can’t force a franchisee’s hand when it comes to insisting on significant capital expenditure during the term of a franchise agreement. Exceptions to this include costs included in the disclosure documents provided before the franchise agreement is entered into. Likewise, franchisees may be required to take action if the franchisor can justify the need for the outlay. Justification could include the reasons behind the decision (for instance renovations to align with the franchisor’s brand) and anticipated costs to the franchisee coupled with return on investment.  As an act of good faith, it would also be good to include any perceived risks the franchisee may face. 

It’s important to know the terms of your franchise/lease agreement before you enter into it.

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