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
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
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
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
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their premises for many years, so that a fit-out is out of date and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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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