Franchise Agreements In New Zealand: What Franchisees And Franchisors Need To Know

Franchising can be a great way to grow a business (if you're a franchisor) or to get into business with an established system (if you're a franchisee).

But there's one document that can make or break the relationship: the franchise agreement.

A franchise agreement isn't just "paperwork". It sets out the rules of the game for years to come - including what fees are payable, how you can use the brand, what training and support is provided, what happens if targets aren't met, and how the relationship ends if things don't work out.

Below, we'll walk you through what a franchise agreement typically includes in New Zealand, the most common risks we see for small businesses, and practical steps to protect yourself before you sign (or before you offer one to franchisees).

Note: This article provides general information only and isn't legal, financial, accounting, or tax advice. Franchise arrangements can be complex, and what's "right" depends on your circumstances - including how GST, income tax, and other costs apply to your specific model. If you're considering a franchise, it's worth getting tailored advice.

What Is A Franchise Agreement (And Why Does It Matter So Much)?

A franchise agreement is a contract where a franchisor gives a franchisee the right to operate a business using the franchisor's brand, systems, and know-how, usually in exchange for fees (like an initial franchise fee and ongoing royalties).

In practice, a franchise agreement will usually sit alongside other key documents, such as:

• Operations manuals (often incorporated by reference and updated over time)
• Lease documents (if the franchise requires premises)
• Supply arrangements (approved suppliers, minimum purchase requirements, rebates)
• Training and onboarding materials
• Marketing fund rules (how contributions are collected and spent)

Franchise relationships are usually long-term and tightly structured. That's why the agreement matters so much: it's effectively your rulebook for running the business day-to-day.

In New Zealand, franchising is not governed by a mandatory franchise-specific code. It is largely self-regulated, with some franchisors choosing to follow industry standards and voluntary disclosure practices (for example, through industry bodies). Regardless, general laws still apply (including the Fair Trading Act 1986 and contract law), and the enforceability of key terms will depend on what's actually in your documents.

If you're drafting or signing one, it's worth getting a franchise agreement that reflects how the franchise really operates - not a generic template that leaves gaps when something goes wrong.

Key Clauses In A Franchise Agreement You Should Understand Before Signing

Most disputes we see in franchising come back to a handful of "core" clauses that weren't fully understood upfront. Here are the big ones to focus on.

1. Territory And Exclusivity

Your franchise agreement should be clear about whether you receive:

• Exclusive territory (the franchisor can't open another franchise or company-owned outlet in that area)
• Non-exclusive territory (competition may be allowed)
• No territory at all (common for online or mobile models)

Also watch for modern territory issues, like online sales, delivery areas, and digital advertising that might reach "your" customers.

2. Fees, Royalties, And Marketing Contributions

Franchise fees can be more complicated than they look at first glance. Your agreement may include:

• Initial franchise fee (upfront)
• Ongoing royalties (fixed fee or percentage of revenue)
• Marketing/advertising fund contributions
• Training fees (initial and ongoing)
• Technology fees (POS systems, software subscriptions)
• Audit fees (sometimes payable if discrepancies are found)

Make sure you understand what fees are payable even if the business isn't profitable - many royalty models are based on revenue, not profit.

Also check whether amounts are expressed as GST-inclusive or GST-exclusive, and how and when GST is added (if applicable).

3. Brand Use And Intellectual Property

The heart of franchising is the right to use the brand. A franchise agreement typically covers:

• how you can use trade marks, logos, and branding
• quality control and brand standards
• what happens to signage, uniforms, social media accounts, phone numbers, and domain names when the agreement ends

For franchisees, this is about certainty: you want confidence you can operate without constantly worrying you're breaching brand rules.

For franchisors, this is about protecting your IP and ensuring consistency across the network.

4. Operational Controls (And How Much Freedom You Really Have)

Franchise agreements usually require franchisees to follow the franchisor's systems. This might include:

• opening hours
• pricing rules (or pricing guidance)
• approved suppliers and product ranges
• store fit-out requirements
• training requirements for staff
• reporting and KPIs

This isn't necessarily a bad thing - many franchisees choose franchising because they want a proven system. The key is understanding what's mandatory, what's recommended, and what can change over time.

5. Term, Renewal, And Exit

A well-drafted franchise agreement should spell out:

• how long the agreement runs for (the "term")
• renewal rights (if any) and renewal conditions (fees, refit requirements, performance criteria)
• termination rights (for both parties) and "default" processes
• restraint of trade clauses after termination
• what happens to stock, customer data, and business assets

Be especially careful with clauses that allow the franchisor to terminate quickly (sometimes called "immediate termination" or "termination for cause"). You'll want to understand what triggers termination and whether there is a fair chance to remedy a breach.

Because these clauses have long-term consequences, many businesses opt for a proper franchise agreement review before signing.

What Franchisees Should Do Before Signing A Franchise Agreement

If you're buying into a franchise, it's normal to feel pressure to "move fast" - especially if there's a location involved or other interested franchisees.

Still, rushing this step can lock you into years of obligations. Here's a practical checklist to slow things down (in a good way) and protect your investment.

1. Treat The Franchise Agreement Like A Business Purchase Decision

You're not just signing a contract - you're buying a business model. Before signing, you should understand:

• your expected total upfront costs (fit-out, equipment, stock, training, initial fees)
• your ongoing costs (royalties, marketing contributions, staffing, rent, supplier costs)
• what support you actually get (and how it's documented)

If you'll be leasing premises, get the lease reviewed early. A lease can outlast (or clash with) your franchise term, so it's smart to line up your timelines and exit rights. A Commercial Lease Review can be a lifesaver here.

2. Check What You're Allowed To Sell (And Where You Can Sell It)

Some franchisees assume they can add extra products or services to boost revenue. Many franchise systems restrict this heavily.

Make sure the agreement clearly covers:

• approved products/services
• approval processes for new products
• online sales rules (including whether the franchisor sells online into your area)

3. Understand Your Real "Exit Options"

Ask yourself: if this doesn't work out, what can you do?

Your ability to exit might depend on:

• the franchisor's consent to transfer/sell the franchise
• transfer fees and conditions
• whether there's a "right of first refusal" for the franchisor to buy it back
• restraint of trade limits (for example, not operating a similar business for a period)

4. Get Clear On Data, Marketing, And Customer Lists

Franchises often rely on shared marketing tools, mailing lists, and CRM systems. That raises two practical issues:

• Who owns the customer data?
• Who is responsible for privacy compliance?

In New Zealand, the Privacy Act 2020 applies if personal information is collected, used, stored, or disclosed (which is common in loyalty programs, online bookings, delivery, mailing lists, and CCTV).

Many franchisors require franchisees to follow network privacy rules. If your franchise collects customer information, you'll often need a Privacy Policy that matches what you actually do.

5. Don't Forget Employment Responsibilities

Even though you're part of a franchise, you're usually running your own business and employing your own team. That means you need to comply with employment obligations, including the Employment Relations Act 2000, wage and time record requirements, and holiday and leave entitlements.

Your franchise agreement may also require you to train staff to brand standards, follow rostering rules, or use certain HR systems.

It's a good idea to have a compliant Employment Contract in place from day one, especially if the franchisor provides "templates" that aren't tailored to your business or role types.

What Franchisors Need To Get Right When Offering A Franchise Agreement

If you're franchising your business, your franchise agreement needs to do two jobs at once:

• support franchisees with clear systems and expectations, so the network thrives
• protect the brand and the franchisor, so one location doesn't create network-wide risk

Here are the key issues franchisors should focus on when building (or updating) franchise documents.

1. Clear And Honest Representations (To Avoid Misleading Conduct Risks)

Marketing a franchise opportunity is not just "sales". In New Zealand, the Fair Trading Act 1986 prohibits misleading or deceptive conduct in trade.

That means you need to be careful about:

• profit claims (especially if they're not based on reasonable grounds)
• statements like "guaranteed income" or "low risk"
• omitting key information that would change the overall impression

A strong agreement helps, but it won't "fix" misleading sales conduct. Your franchise documents and onboarding process should match the reality of the franchise model.

2. Consistency Across The System (While Allowing Practical Updates)

Most franchisors need the ability to evolve:

• new technology
• new suppliers
• updated branding
• new product lines
• updated compliance processes

Your franchise agreement should clearly set out what can be updated (for example, via an operations manual), what requires consultation, and what requires franchisee consent.

It's common to document early-stage terms in a Heads of Agreement before the full suite is finalised, but it's important to be very clear about what is binding and what is not.

3. Managing Network Risk (Quality Control, Health And Safety, And Complaints)

If you operate a franchise network, one poor-performing franchise can damage the brand for everyone.

Franchise agreements often include audit rights, inspection rights, and mandatory training to manage quality and compliance. This is also relevant to the Health and Safety at Work Act 2015, where duties can apply depending on the working arrangements and degree of influence/control (this can get complex, so tailored advice is important).

The best time to set expectations is at the start, in writing, in a properly structured agreement.

4. A Practical Enforcement And Termination Process

From a franchisor's perspective, you need a clear pathway for:

• identifying breaches (for example, non-payment, brand damage, repeated customer complaints)
• giving notice and time to fix issues (where appropriate)
• termination when the relationship can't be saved
• brand protection post-termination (de-branding, handover of numbers/accounts, return of manuals)

This should be drafted carefully to align with New Zealand contract principles (including the Contract and Commercial Law Act 2017) and to reduce the risk of disputes about whether termination was valid.

If you're building a franchise network, working with a franchise lawyer early can help you avoid costly "patch jobs" later.

Common Legal Issues In Franchise Agreements (And How To Avoid Them)

Even strong franchise systems can run into problems if the legal foundations don't match the commercial reality. Here are common pressure points to watch.

Unclear Financial Terms

Disputes often arise when "what the franchisee thought they were paying" doesn't match the agreement (or when additional fees appear later).

Make sure fee clauses are:

• clearly defined (including GST treatment)
• linked to timing (weekly/monthly) and method of payment
• clear on whether fees are refundable (often they're not)

Marketing Fund Confusion

Marketing contributions are common, but franchisees usually want transparency on:

• how the fund is spent
• whether it can be used for franchisor expenses
• whether local marketing is required in addition to fund contributions

A franchisor who communicates well here often avoids a lot of conflict.

Supply And Rebate Arrangements

Franchise agreements often require franchisees to buy from approved suppliers. This can protect quality and consistency, but it can also raise concerns if the franchisor receives rebates or has supplier ownership interests.

Clear drafting and disclosure help manage expectations and reduce trust issues later.

Restraint Of Trade Clauses That Go Too Far

Restraint clauses can be enforceable, but only if they're reasonable (for example, limited in time, geographic area, and scope). Overly broad restraints can be difficult to enforce and can become a major dispute point when a franchise ends.

Renewal And Refurbishment Requirements

Some agreements require a major refit/refurbishment as a condition of renewal. That can be commercially reasonable (to keep the brand modern), but it should be clearly spelled out so franchisees can budget and plan.

Key Takeaways

• A franchise agreement is the rulebook for the franchise relationship, and it usually has long-term operational and financial consequences.
• Franchisees should focus on core clauses like fees, territory, brand use, operational controls, and (most importantly) exit and termination rights before signing.
• Franchisors need a franchise agreement that protects the brand while setting clear, workable standards for franchisees across the network.
• New Zealand laws like the Fair Trading Act 1986, Contract and Commercial Law Act 2017, Privacy Act 2020, and Health and Safety at Work Act 2015 can all be relevant to how a franchise is sold and operated.
• Leases, privacy compliance, and employment obligations often sit alongside the franchise agreement, so your legal setup needs to be consistent across all documents.
• A well-structured agreement (and good advice before you sign) can save you major costs and stress later - especially around disputes, renewals, and termination.

If you'd like help reviewing, drafting, or updating a franchise agreement, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.