What are the Changes to the Franchising Code of Conduct?
If you are a Franchisor, an existing Franchisee or thinking of becoming a Franchisee or Franchisor, it is important you know what the recent changes to the Franchising legislation mean for you.
In this article, we take a look at the Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) changes to the Franchising Code of Conduct (the Code) that apply from 2 June 2021 and 1 July 2021, and how you can get ready to ensure you’re meeting your obligations. We will cover the changes that apply from 1 November 2021 in a separate article to come.
1. Changes to the Disclosure Process from 1 July 2021
There are some new procedural requirements that apply to Disclosure Documents and the issuing of Franchise documents from 1 July 2021. These are:
An Information Statement must be provided (in the new current form on the ACCC website) to the Franchisee before the Franchise Agreement and Disclosure Document;
A Key Facts sheet must be provided with the Franchise Agreement and Disclosure Document (in the form on the ACCC website);
A copy of the Lease of the premises must be provided to the Franchisee if the premises are leased to the Franchisor and the Franchisee will receive a sublease or license to occupy;
Copies of any retail disclosure statements relating to the Lease; and
A Franchisor must give the Disclosure Document in the form requested by the Franchisee (electronic, hard copy or both).
Importantly, Franchisors should keep in mind that:
if you give a Franchisee earnings information separately that isn’t provided with the Disclosure Document, you’re deemed not have provided the Disclosure Document, and you’ll have to start the 14-day disclosure process all over again before you can enter into the Franchise Agreement; and
if your Franchisees are required to expend significant capital expenditure, this must be set out in the Disclosure Document (which isn’t a new requirement), however, the new obligation is to include as much information as possible about the expenditure, effectively the business justification for it, to discuss it with the Franchisee and the circumstances under which they are likely to recoup the expenditure having regard to the geographical area of operations of the Franchisee.
2. Changes needed to Franchise Agreements from 1 July 2021
There have been a number of detailed changes made to the Code that will affect the terms of Franchise Agreements. We’ve summarised these for you below, however, we recommend you obtain your own legal advice on the changes to ensure that your Franchise Agreement (if it will be entered into, renewed or extended after 1 July 2021) meets these requirements.
Legal Costs
A Franchisor can’t require a Franchisee to pay all or part of the Franchisors’ legal costs in relation to preparing, negotiating or executing the Franchise Agreement or other documents relating to it, unless a fixed amount is included in the Franchise Agreement.
So, if you’re a Franchisor, the fixed amount of the legal costs you intend to pass on to your Franchise should be clearly defined in your Franchise Agreement so that you can recover these costs. As a Franchisee you should check this before you sign.
Cooling Off Provisions
For new Franchise Agreements, the cooling-off period has been changed from 7 days to 14 days. There is also now a cooling-off period that applies to a transfer of a Franchise Agreement between an old Franchisee and a new Franchisee. It ends on whichever is earliest:
The period of 14 days starting on the day after the new Franchisee becomes the Franchisee under the Franchise Agreement, and the period ending on the day the new Franchisee takes possession and control of the Franchised Business. If the Franchisor leases premises and will give the Franchisee a licence to occupy the premises, or if the Franchisee will enter into a lease itself, then the Franchisee can terminate the Franchise Agreement within 14 days after receiving the terms of the licence to occupy or lease if before entering into the Franchise Agreement they did not receive a copy of the lease or licence on the same terms (excluding any changes requested by the Franchisee).
If you’re a Franchisor:
It is really important that you provide the Franchisee with the terms of the lease or proposed licence to occupy as soon as possible (ideally at the same time as the Franchise Agreement and Disclosure Document), to avoid triggering the above cooling-off provision; and if the Franchisee terminates during the cooling-off period, you must, within 14 days, repay all payments made by the Franchisee to you that are connected with the Franchise Agreement.
Capital Expenditure
A Franchise Agreement can no longer require a Franchisee to pay for significant capital expenditure if a business justification statement is provided by the Franchisor during the term of the Franchise Agreement.
Instead, any significant capital expenditure required for business justification reasons has to be set out in the Disclosure Document (see comments in the section above) before a Franchisee enters into the Franchise Agreement.
Marketing Fund
If a marketing fund is controlled or administered by a fund administrator, then the fund administrator has the responsibility to prepare the financial statements and obtain the audit report (if applicable) or conduct the vote to reach an agreement to non-audit and give the financial report and audit report to Franchisees.
The fund administrator will need to open and operate a separate bank account for payments to the fund by Franchisees.
Termination Rights
A Franchisee now has the right to terminate the Franchise Agreement at any time. They have to give the Franchisor a written proposal for the termination, and the Franchisor must provide a substantive response within 28 days. If the Franchisor refuses to terminate, the parties can use the dispute resolution process (also noting that the obligation to act in good faith applies).
A Franchisor has a right to terminate on particular grounds (which used to be called special circumstances), however, they now have to provide 7 days written notice of the proposed termination to the Franchisee. There is also a fast-tracked dispute resolution process if a dispute is initiated under this section.
Variation of Franchise Agreement
A Franchisor is prohibited from varying a Franchise Agreement with retrospective effect without the written consent of the Franchisee. Restraint of Trade Clause 23 of the Code has been narrowed so that a restraint of trade has no effect if a Franchisee asked to extend the Franchise Agreement and immediately before expiry, they were not in a serious breach…and the other conditions in clause 23 apply.
Dispute Resolution
Instead of mediation, the Code now refers to an ’ADR Process’ which involves conciliation or mediation. ADR is short for alternative dispute resolution, which is a process that involves an independent person helping the Franchisor and Franchisee to resolve the dispute and doesn’t include going to Court or a tribunal.
The Franchise Agreement must contain the new complaint handling procedure which includes requirements that:
If the parties cannot agree on how to resolve the dispute within 21 days, any party may refer the matter to an ADR practitioner for an ADR process;
if the parties cannot agree on who should be the ADR practitioner, any party may request the Australian Small Business and Family Enterprise Ombudsman (the Ombudsman) to appoint an ADR practitioner; the Ombudsman must appoint an ADR practitioner within 14 days of the request, and the ADR process can be conducted by virtual technology.
The dispute may be resolved in whole or part by arbitration if agreed to in a written agreement by the Franchisor and Franchisee. The Franchise Agreement could state this, or it could be set out in a separate agreement. A Franchise Agreement must not require the Franchisee to pay the costs incurred by the Franchisor in relation to settling a dispute under the Franchise Agreement.
Good Faith
The Code now simply says that a Franchise Agreement must not contain a clause that seeks to limit or exclude the obligation to act in good faith.
There are also clauses that relate to Co-operatives and New vehicle dealership agreements.
If you are a Franchisor, an existing Franchisee or thinking of becoming a Franchisee or Franchisor and need some help understanding the changes to the Code and how they affect you, please reach out.
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