Assistance to the franchisee in finding premises and area reservation contract

Franchise: site search and area reservation contract

Finding suitable commercial premises is often one of the main difficulties faced by a prospective franchisee. Can the franchise agreement be signed before a location has been found? What support should the franchisor provide? Does a territory reservation agreement help secure this search period?

The location of the point of sale can determine the success of the entire franchise project. Its visibility, accessibility, catchment area, rent amount, and the conformity of the premises to the concept directly influence the franchisee's operating prospects.

However, some candidates sign their franchise agreement and pay an entry fee even though they do not yet have a commercial property. They then commit to opening their establishment within a specified timeframe, without necessarily having obtained the location, the commercial lease, or the necessary financing.

In this situation, the prior signing of a zone reservation contract can allow the prospective franchisee to search for their premises while benefiting, for a limited period, from exclusivity or priority in a given territory.

Can you sign a franchise agreement before you've found your premises?

No text prohibits signing a franchise agreement before identifying the premises in which the business will be operated.

This practice, however, presents significant risks. By signing the franchise agreement immediately, the candidate may, in particular:

• to pay all or part of the entrance fee;
• commit to opening their point of sale within a specified period;
• to cover the costs of training or integration into the network;
• begin to perform certain contractual obligations;
• lose the sums paid if the project does not succeed;
• risking termination of the contract in case of failure to open.

The prospective franchisee may therefore find themselves definitively committed even though they do not yet know if they will be able to find premises that meet the network's criteria, negotiate an acceptable commercial lease and obtain their financing.

The immediate conclusion of the franchise agreement must therefore be handled with caution when location is an essential condition for the success of the project.

What is a franchise area reservation contract?

The area reservation contract, sometimes called a territorial reservation contract, allows the franchisor to temporarily reserve a geographical area for the benefit of a prospective franchisee.

During the term of this contract, the franchisor generally commits to not granting the same territory to another candidate. The prospective franchisee therefore has a period of time to:

• search for commercial premises;
• analyze the catchment area;
• obtain the franchisor's agreement on the location;
• negotiate the commercial lease or the acquisition of the business;
• finalize your business plan;
• to apply for bank financing;
• to complete the necessary administrative procedures;
• to establish the company that will operate the franchise.

The area reservation agreement is therefore a preparatory contract to the franchise agreement. It allows for the organization of the period between the initial discussions with the network and the final conclusion of the franchise agreement.

It should not be confused with a definitive promise of a franchise agreement. Its content must specify whether the subsequent signing of the franchise agreement is automatic once the stipulated conditions are met, or whether it remains subject to the final agreement of the parties.

Is a zone reservation contract mandatory?

The zone reservation contract is not legally required.

The franchisor can perfectly well enter into a franchise agreement directly with a candidate who does not yet have premises. However, they must carefully consider the risks associated with this contractual arrangement, particularly when they impose a deadline for opening and promise to actively assist the franchisee in their search.

When a suitable location has not yet been found, a zone reservation contract offers several advantages:

• It avoids prematurely starting the term of the franchise agreement;
• It allows you to reserve the territory without immediately committing to the entire contractual relationship;
• It specifies the steps expected of each party;
• it frames the franchisor's involvement in the search for premises;
• He organizes the fate of the sums paid if the project does not succeed;
• It allows a deadline to be set for the completion of the project.

However, this contract does not eliminate all risks. Its effectiveness depends on the precision of its drafting and the consistency of the commitments made by the parties.

What should the zone reservation contract stipulate?

A franchised area reservation contract should specify the following elements.

The exact definition of the reserved area

The territory must be identified with sufficient precision: municipality, district, list of streets, mapped area, kilometer radius or a combination of several criteria.

A general formula such as "city center" or "northern sector" can be a source of dispute if it does not allow the limits of the reservation to be clearly defined.

The nature of territorial protection

The contract must state whether the candidate benefits from:

• of territorial exclusivity;
• of a simple priority;
• of a right of first presentation;
• or only the franchisor's commitment not to simultaneously pursue negotiations with another candidate.

It is also necessary to determine whether this protection only concerns the establishment of a physical point of sale or whether it extends to other channels: online sales, delivery, corners, establishment in a shopping mall or opening under another brand of the same group.

The duration of the reservation

The reservation must be limited in time. Its duration must be long enough to allow for a thorough search for premises and securing financing, without indefinitely tying up an area for the franchisor.

The contract may provide for an extension when the candidate demonstrates advanced steps, for example when a lease agreement is being negotiated or a funding request is being processed.

The characteristics of the desired premises

The criteria for validating the premises must be defined as objectively as possible:

• minimum and maximum surface area;
• location and visibility;
• accessibility;
• pedestrian or vehicular traffic;
• characteristics of the catchment area;
• delivery options;
• parking;
• extraction or technical equipment;
• purpose of the commercial lease;
• maximum amount of rent and charges;
• necessary work;
• compliance with applicable standards.

These criteria allow the candidate to effectively direct their search and limit the risk of a late rejection from the franchisor.

The obligations of the franchisee candidate

The contract may require the candidate to demonstrate regular steps taken: using a real estate agency, visits, submitting files, applying for financing or periodically presenting a progress report.

These obligations must remain compatible with the independence of the franchisee candidate and must not lead to imposing unrealistic commitments on him/her.

The assistance promised by the franchisor

The contract must precisely describe the support offered by the franchisor:

• transmission of the implementation criteria;
• analysis of proposed locations;
• visit of the premises;
• study of the catchment area;
• validation or reasoned refusal of the location;
• review of the draft commercial lease;
• assistance in negotiations with the landlord;
• preparation of the file intended for the banks;
• connecting with financiers or real estate professionals.

The more precisely the contractual or advertising documentation describes this assistance, the more the franchisor must be able to demonstrate that it actually provided it.

The amount paid and its repayment conditions

The contract must clearly state:

• the amount of the booking fee;
• its legal nature;
• the services it remunerates;
• the conditions for its deduction from the entry fee;
• situations in which it remains under the control of the franchisor;
• the conditions under which it must be returned, in whole or in part.

It should not be assumed that a deposit paid for a reservation will be automatically refunded if the applicant does not find a property. The fate of this deposit depends primarily on the terms of the contract, subject to their validity and the circumstances of the termination.

Does the DIP (Public Information Document) have to be submitted before the zone reservation contract?

ArticleL. 330-3 of the Commercial Code requires the delivery of a pre-contractual information document, or DIP, at least twenty days before the signing of the contract or before the payment of a sum required prior to its conclusion.

When a reservation agreement is part of the franchise agreement process and involves the payment of a deposit, the prior delivery of the Disclosure Document (DIP) should be seriously considered. In practice, it is advisable to provide the DIP to the prospective franchisee at least twenty days before the reservation agreement is signed or the corresponding deposit is paid.

The pre-contractual information document (DIP) must include the franchisor's identity and experience, the state of the network, the main characteristics of the market, and the essential conditions of the future contract.

However, it is important to distinguish between the market overview that must be included in the Disclosure Document and a genuine local site assessment or a personalized financial forecast. The franchisor should not present a general study as a guarantee of the future outlet's profitability.

What assistance should the franchisor provide in the search for premises?

The franchisor is not, in principle, obligated to find the franchisee's premises. The franchisee remains an independent entrepreneur, responsible for their project and operational choices.

However, when the pre-contractual information document, reservation contract, franchise agreement, operating manual or commercial documents promise assistance in finding premises, the franchisor must respect the commitments made.

The scope of this obligation then depends on the wording of the contractual and advertising documents.

A clause that only requires the communication of location criteria does not necessarily obligate the franchisor to actively search for premises. However, a promise that includes site analysis, visits, lease review, negotiation with landlords, or preparation for bank meetings implies a more concrete commitment.

The franchisor must be able to retain proof:

• exchanges with the candidate;
• premises examined;
• visits carried out;
• opinions given;
• reasons for validation or refusal;
• observations made on the lease;
• steps taken with the funders.

Can limited assistance give rise to liability on the part of the franchisor?

The Paris Court of Appeal ruled on this issue in a judgment dated March 30, 2022.

In this case, two candidates had signed a pre-contractual information document (DIP), then a franchise agreement stipulating the payment of an entry fee of 50,000 euros and the opening of a restaurant within six months. No intermediate area reservation agreement had been concluded.

The franchisees had been unable to find suitable premises or secure financing. They criticized the franchisor for insufficient assistance in finding locations and dealing with banks.

The court noted in particular that the contractual process did not include any area reservation phase allowing candidates to search for a location and study their market before signing the franchise agreement.

She also compared the assistance actually provided with the services advertised in the contractual and advertising documents: preparation for bank interviews, review of leases and locations, and assistance in negotiations with landlords and sellers.

The court considered that the support provided had not lived up to the commitments announced and ordered the franchisor to compensate the franchisees.

The termination was nevertheless ruled to be on the grounds of shared fault. The franchisees had ended the contract without prior notice and had moved on to another project, while the franchisor offered to extend the search period.

This decision does not mean that a zone reservation contract would be systematically mandatory. It does, however, show that the organization of the contractual journey and the effectiveness of the promised assistance can be taken into account when assessing the respective responsibilities of the parties.

CA Paris, division 5, chamber 4, March 30, 2022, no. 20/06507.

What to do when the premises are not found within the allotted time?

Candidates experiencing difficulties should not wait until the application deadline has expired.

The applicant must inform the franchisor, provide evidence of their research, and request, if necessary, an extension of the reservation agreement or the opening deadline. Any difficulties related to financing, site approval, or lease negotiations must be reported in writing.

Before terminating the contract, it is also advisable to:

• to examine the termination clauses;
• to check if a formal notice is necessary;
• to formally request the promised assistance;
• to propose a reasonable additional timeframe;
• to keep proof of the steps taken;
• to precisely identify the shortcomings attributed to the other party.

A hasty termination can lead the candidate to bear some responsibility, even when the franchisor's support has been insufficient.

Should the franchise be conditional on obtaining premises and financing?

When the franchise agreement is signed before the project is finalized, it is recommended to include sufficiently precise conditions precedent.

These may relate to:

• obtaining premises validated by the franchisor;
• the signing of a commercial lease that meets the needs of the business;
• obtaining bank financing;
• obtaining the necessary administrative authorizations;
• the absence of any technical obstacle to the fitting out of the premises;
• the formation of the franchisee's company.

The contract must specify the time frame for fulfilling these conditions, the steps expected of the candidate, and the fate of sums already paid.

A poorly drafted suspensive condition can become an additional source of dispute. In particular, it is necessary to determine whether the condition is deemed to have failed when the candidate does not take the steps necessary to fulfill it.

How to secure the search for commercial premises?

For the franchisor, securing the process notably involves:

• to put in place a suitable zone reservation contract;
• harmonise the pre-contractual information document, the reservation contract, the franchise agreement and the marketing materials;
• not promising assistance that cannot actually be provided;
• formalize the criteria for validating the premises;
• organize the traceability of the support;
• to precisely determine the fate of the booking fee and the entrance fee.

For the prospective franchisee, it is recommended to:

• do not sign the final contract too quickly;
• verify the duration and extent of the territorial reservation;
• have the draft commercial lease analyzed;
• negotiate suitable conditions precedent;
• to establish its own financial forecasts;
• request the promised assistance in writing;
• to keep proof of all your research.

ARST Avocats' support

Finding a location should not be treated as a mere formality prior to opening the franchise. It must be integrated into the contractual and financial structure of the project.

ARST Avocats assists franchisors and franchisees in drafting and negotiating the pre-contractual information document (DIP), the area reservation contract, the franchise agreement and the commercial lease, as well as in litigation relating to the failure of the establishment.

To secure the development of a network or an implementation project, you can consult our Contract and Distribution Law.

Morgan Jamet,
Partner Attorney – ARST Avocats