What is a deposit agreement?

A deposit agreement is a contract entered into between a franchisor and a prospective franchisee in the negotiation stages before the parties enter into a formal franchise agreement. The purpose of the agreement is to set out what deposit the franchisee must pay to the franchisor, the purpose of the deposit and the circumstances in which the deposit will or will not be refundable. If the franchisor and franchisee ultimately enter into a franchise agreement, the deposit should be reimbursed by the franchisor or be set-off against the franchisee’s initial franchise fee.  If, after signing a deposit agreement, the franchisee decides to pull out of negotiations some of the deposit may be refundable. The British Franchise Association’s code of ethics provides that the franchisor will be able to retain part of the deposit to cover any direct expenses it has incurred during the pre-franchise agreement negotiations, but the rest of the deposit should be refunded to the franchisee. Direct expense may cover costs already expended in setting up the franchise such as estate agent, surveyor, solicitor and accountants’ fees, as well as costs incurred researching the territory that the franchisee intends to set up in. Details of what costs will be deducted from the refundable deposit must be specified in writing in the deposit agreement.