Franchising overhaul: The new Franchising Code of Conduct explained

Summary

A tiered penalty system continues to exist under the New Code whereby:

1. specific breaches of the New Code, such as a failure to disclose materially relevant facts pursuant to section 34(1) or (2), will incur penalties of at least A$10 million; and
2. non-compliance with other substantive obligations placed on franchisors, such as the obligation to act in good faith (which continues to apply under the New Code), will incur increased civil penalties equating to 600 penalty units (currently A$198,000).

Reference

Section 11 (Civil penalty provisions of the Code) 

Section 17 (Amount of civil penalty for certain contraventions by bodies corporate)

Summary

The functions of the ASBFEO have been expanded, allowing it to publicise the names of franchisors who do not meaningfully participate in ADR processes under the New Code. This change intends to encourage franchisors to meaningfully participate in the ADR process.

These publication rights apply in relation to conduct of a franchisor occurring on or after 1 April 2025, in relation to a franchise agreement entered into, transferred, renewed or extended on or after 1 January 2015.

Reference

Section 16 (Functions of Australian Small Business and Family Enterprise Ombudsman

Section 78 (Ombudsman may publish franchisor’s refusal to engage in ADR process) 

Section 97 (Application of this instrument –agreements entered into etc on or after 1 April 2025)

Summary

Section 20 requires a franchisor to create a disclosure document that gives prospective franchisees information about the franchise (as set out in Schedule 1).   

Additional information must now be included about whether franchisee will be required to undertake significant capital expenditure, including the rationale for the expenditure. 

Transitional provisions relating to certain disclosure documents given before 1 April 2025 apply to this requirement. In summary:

1. Disclosure documents given to prospective franchisees before 1 April 2025 do not need to be re-provided in a manner that is compliant with the New Code, provided the franchise agreement to which it relates is entered into before 1 November 2025.
2. Disclosure documents created before 1 November 2025 do not need to include specific information about significant capital expenditure (as set out in item 14(1A) or 14(1B) of Schedule 1).

Reference

Section 20 (Franchisor must create disclosure document)

Section 47 (Discussion about significant capital expenditure disclosed in disclosure document)

Section 60 (Franchisor may require only certain significant capital expenditure)

Section 99 (Transitional arrangements relating to certain disclosure documents given before 1 April 2025)

Summary

Section 21 of the New Code clarifies the requirement for franchisors to update a disclosure document within four months from the first day of the ‘current financial year’ (being the year that the franchisor is a party to the franchise agreement). 

Section 21 is based on clause 8 of the Former Code but provides further that the disclosure document must be updated so that it reflects the current position of the franchise and the franchisor, as at the date of the update, and any relevant amendments made to the New Code since the disclosure document was created or last updated. 

A civil penalty (of 600 penalty units) applies to a contravention of the section.

This does not apply to any disclosure document prepare before 1 November 2025.

Reference

Section 21 (Updating disclosure document  – generally)

Section 99 (Transitional arrangements relating to certain disclosure documents given before 1 April 2025)

Summary

Section 23 and 24 of the New Code effectively redraft clause 9 of the Former Code, but with some significant updates: 

1. Opt-outs: opt out provisions have been included, allowing a franchisee to opt out of receiving certain disclosure documents and a copy of the New Code in specific circumstances.
2. 14-day consideration period: a franchisor (rather than both parties) must not execute a franchise agreement (that is, enter, renew or extend an agreement) with a prospective franchisee, or consent to the transfer a franchise, before the end of a 14-day ‘consideration’ period.
3. Repayment: In relation to a franchise agreement proposed to be entered into, renewed or extended, there is a new obligation on a franchisor to repay any payments made by prospective franchisees during the 14-day consideration period, if requested by the franchisee in writing.
4. Key facts sheet: all references to a key facts sheet have been removed from the New Code, with franchisors now required to include all requisite information within the disclosure document (refer to Schedule 1 of the New Code).

Reference

Section 23 (Entering into, renewing and extending franchise agreements)

Section 24 (Transferring franchise agreements)

Summary

Certain obligations are imposed on fund administrators where franchisees are required to pay money into a specific purpose fund (formerly known as ‘marketing funds’). This change, in effect, extends the existing obligations that apply to marketing funds, to all funds collected for a common purpose. Such obligations include:

1. preparing annual financial statements;
2. having those statements audited (unless agreed by a majority of paying franchisees otherwise); and
3. providing copies of the same to franchisees.

Item 15 of Schedule 1 (which sets out information to be included in a disclosure document, as required by Section 20) has also been changed to require franchisors to disclose whether they must spend part of the funds collected on franchisees’ specific business each financial year.

Transitional provisions exist:

1. For specific purpose funds that are marketing or other cooperative funds, between 1 April 2025 and 31 October 2025, fund administrators will be considered compliant if they have complied with the Former Code.   
2. For specific purpose funds that are not marketing funds or other cooperative funds:
   1. section 31 (financial statements) and section 61 (payments to and from funds) do not apply in relation to the fund before 1 November 2025; and
   2. disclosure documents created before 1 November 2025 are not required to include the information set out in item 1 of Schedule 15.

Reference

Section 31 (Financial Statements for Specific Purpose Funds)

Section 61 (Payments to and from specific purpose funds)

Section 100 (Transitional arrangements relating to specific purpose funds that are marketing or other cooperative funds-deemed compliance)

Summary

This section requires franchisors to provide franchisees with materially relevant facts that are not included in a disclosure document. This updates former clause 17 of the Former Code by requiring franchisors to also disclose proceedings/judgments relating to contraventions of the responsible franchisor entity provisions of the Fair Work Act 2009. 

A failure to disclose materially relevant facts attracts the higher tier penalty under the New Code.

Reference

Section 34 (Disclosure of materially relevant facts)

Summary

New civil penalty provisions have been included in the record keeping obligations under the New Code, with franchisors who fail to comply being liable to civil penalties of up to 600 penalty units (approx. $200,000). 

Reference

Section 37 (Keeping certain information and documents)

Summary

The restraint provisions have been extended, to now provide that, instead of restraints of trade being ineffective in certain circumstances where a franchise agreement expires, they are expressly prohibited in circumstances where a franchise agreement is not renewed or extended. 

Franchisors who rely (or purport to rely) on such restraints are liable to civil penalties of up to 600 penalty units (approx. $200,000).

Reference

Section 42 (Restraint of trade clause if franchise agreement not renewed or extended)

Section 67 (Franchisor not to rely on restraint of trade clause if franchise agreement not renewed or extended)

Summary

A new obligation has been introduced in the New Code, which requires all franchise agreements to now provide for compensation where a franchise agreement is terminated before it expires because the franchisor:

1. withdraws from the Australian market;
2. rationalises its networks in Australia; or
3. changes its distribution models in Australia. 

Franchise agreements must now also contain provisions for franchisors to buy back, or compensate, franchisees for certain stock and equipment required in the operation of the franchise if the agreement is terminated before it expires because the franchisor takes any of the steps listed at (a) – (c) above. 

This applies from 1 November 2025. 

Reference

Section 43 (Franchise agreement must provide for compensation for early termination – general) 

Summary

The New Code requires franchise agreements to provide franchisees with a reasonable opportunity to make a return on any investment required by the franchisor as part of the agreement.

Previously, this obligation only applied to new motor vehicle dealership agreements.

The explanatory statement issued by authority of the Minister for Small Business provides in relation to this that ‘what is considered a reasonable opportunity will be specific to the terms of each agreement, the costs paid by the franchisee and the length of the agreement… It is not intended to remove the inherent risks of running a business but is intended to ensure that the term of a franchise agreement is consistent with the level of capital investment required.’

This obligation applies from 1 November 2025.

Reference

Section 44 (Franchise agreement must provide reasonable opportunity for return on investment)

Summary

A franchisor must not enter into a franchise agreement that requires the franchisee to pay all or part of its legal costs in relation to the franchise agreement, except in certain permitted circumstances. The New Code has updated this obligation to now require that legal costs charged to franchisees in such circumstances do not exceed ‘reasonable and genuine legal costs’.

Section 41 repeats the provisions in the Former Code that prevent franchise agreements from requiring the franchisee to pay the franchisor’s costs in settling disputes, and now clarifies that this applies to dispute resolution processes, whether decided under the New Code or otherwise.

Reference

Section 38 (Franchisor’s legal costs relating to franchise agreement)

Section 41 (Costs of settling disputes)

Summary

The New Code updates the 14 day ‘cooling off’ rights of franchisees in circumstances where franchisee agreements are entered into or transferred. 

Now, franchisees may elect to opt-out of the 14-day cooling off period, allowing them to operate the franchise business immediately where:

1. the franchisee has, or has recently had, another franchise agreement with the franchisor that is the same or substantially the same as the franchise agreement; and
2. the business that is the subject of the franchise agreement is the same or substantially the same as the business that is or was the subject of the other agreement.

This new option does not apply automatically – rather, the franchisee is required to opt out in writing.

Reference

Section 50 (Termination by franchisee  – cooling off periods for new franchise agreements)

Section 52 (Termination by franchisee  – cooling off period for transferred franchise agreements)

Summary

Section 57 of the New Code imposes a more streamlined approach for termination. Under this section, franchisees no longer have access to the dispute resolution process in cases of termination for more ‘serious’ breaches (eg failure to hold a required licence, bankruptcy). Rather, in those cases, a franchisor may terminate on seven days’ notice. 

The rationale behind this change is that the franchisee has already gone through the process of a decision being made in regard the items listed. Accordingly, an easier pathway to termination is permitted.

Reference

Section 57 (Termination by franchisor with 7 days’ notice on grounds for which franchisee may not notify dispute)

Summary

Section 58 of the New Code maintains the termination requirements and dispute resolution process in the Former Code for circumstances where:

1. the franchisee voluntarily abandons the franchised business or the franchise relationship;
2. the franchisee operates the franchised business in a way that endangers public health or safety; or
3. the franchisee acts fraudulently in connection with the operation of the franchised business.

If such a ground exists and a franchisor gives notice to terminate, a franchisee may give notice referring the matter to alternative dispute resolution under an expedited dispute resolution process.

Franchisors must not terminate an agreement on the above grounds unless they have adhered to the prescribed notice timeframes. These are:

1. within seven days after the day the termination notice is given, if the franchisee does not give the franchisor a dispute notice; and
2. 28 days after the day the dispute notice is given, if the franchisee gives the franchisor a dispute notice.

Franchisors who fail to comply with the termination timeframes are liable to civil penalties of up to 600 penalty units.

Reference

Section 58 (Termination by franchisor on grounds for which franchisee may notify dispute)