Thinking | 24 June 2021

New changes to the Franchising Code of Conduct

By Jacqui Barrett 

Franchisee-friendly changes to the Franchising Code of Conduct, including enhanced disclosure obligations for franchisors, increased protection for franchisees and enhanced dispute resolution processes are on their way. The majority of these changes are due to come into effect on 1 July 2021.

It is important that franchisors familiarise themselves with the amendments to ensure compliance with the amended Franchising Code of Conduct.

These changes are in response to the Parliamentary Joint Committee’s report on Fairness in Franchising, handed down more than two years ago. The amendments to the Code are contained in the Competition and Consumer (Industry Codes - Franchising) Amendment (Fairness in Franchising Regulations 2021 (Cth).

This article outlines some key changes to the Code and the timing for implementation. For further information, please view the Amending Regulations and Explanatory Statement.

Key changes relating to termination

Amending Regulation
Summary
Application and recommended steps
Insertion of new clause 26A

 

Termination cooling off after transferring franchise agreement

Introduction of a cooling off period where the franchise is transferred from an existing franchisee, whether or not the franchisee is required to enter into a new franchise agreement.

The cooling off period expires at the earlier of:

  • 14 days from the day after becoming franchisee for the purposes of the franchise agreement; or
  • when the franchisee takes possession and control of the franchised business.
Application

Applies to franchise agreements entered into, extended or renewed after 1 July 2021

Recommended step

Franchisors should consider reviewing the form of their Franchise Agreements extension and renewal documents to accommodate the additional cooling off option.

Insertion of new clause 26B

 

Franchisee may propose termination at any time

A franchisee may at any time give the franchisor a written proposal for termination of the franchise agreement.

 

A franchisor must provide a substantive written response to the proposal within 28 days, to which mandatory good faith obligations will apply.

 

A franchisor can make subsequent requests for early termination, provided each subsequent proposal sets out different reasons for termination.

 

If a franchisor elects not to terminate, they must provide reasons for such refusal.

A franchisee then has recourse to the dispute resolution process provided by the Code.

Application

Applies to franchise agreements entered into, extended or renewed after 1 July 2021.

Recommended step

Franchisors should consider reviewing the form of their Franchise Agreements, extension and renewal documents to accommodate the additional termination right.

Repeal and insertion of new clause 29

 

Termination

The franchisor can no longer terminate a franchise agreement with immediate effect in special circumstances (such as insolvency, fraud etc).

The immediate termination power has been replaced by a seven day notice period. The franchisor may only terminate if seven days’ written notice of the proposed termination has been given to the franchisor.

If the franchise disputes the proposed termination then:

  • the franchisor must not terminate the agreement until 28 days after the notice date; and
  • the franchisee may refer the matter to an ADR practitioner or request the Australian Small Business and Family Enterprise Ombudsman (Ombudsman) to appoint an ADR practitioner.

During the 28 day period, the franchisor may direct a franchisee to cease operating the franchised business by written notice (provided such a right exists in the agreement).

 

Under the new section 41C of the Code, where a dispute arises, the parties to a dispute must pay their own costs of attending the ADR process and are equally liable for the costs of an ADR process, unless otherwise agreed between the parties.

Application

Applies to franchise agreements entered into, extended or renewed after 1 July 2021.

Recommended steps

Franchisors should consider updating the form of their Franchise Agreements to provide for the seven day notice period.

 

Franchisors should consider amending their Franchise Agreement to ensure an express right to direct a franchisee to cease operating the franchised business during the 28 day freeze is incorporated.

 

 

Key changes relating to disclosure 

Amending Regulation
Summary
Application and recommended steps
Insertion of new clause 9A Key facts sheet In addition to a disclosure document, a franchisor must provide a key facts sheet to franchisees prior to entering into, renewing or extended the term or scope of a franchise agreement.

A key facts sheet must also be provided to prospective franchisees acquiring the business from an existing franchisee, at least 14 days before the franchisor consents to the transfer.

The key facts sheet is a summary of key information in the disclosure document. It must be in the form published by the ACCC. Compliance is much like the disclosure document – it must be updated annually within four months of the end of financial year and at the franchisee’s request.

Application

Applies from 1 July 2021.

 

Recommended steps

This is an entirely new document that will form part of the suite of documents a Franchisor must supply to a prospective franchisee.

Franchisors will need to ensure that a key facts sheet is prepared for any new, renewed or extended franchises after 1 July 2021.

Amendment of Annexure 1 of Schedule 1 Annexure 1 has been amended to increase the scope of information in the franchisor disclosure document.

Annexure A must now include:

  • details of the percentage of franchisees in the franchise system that were party to an ADR process in the previous financial year;
  • where a franchise premises is subject to a lease held by the franchisor or an associate of the franchisor, provide details of the nature of that interest (ie if the franchisor has an interest as a landlord or head lessee);
  • details of the rebates or other financial benefits received by the franchisor from a supplier in the previous financial year;
  • a summary of the termination rights of both parties under the agreement;
  • a summary of the prospective franchisee’s rights relating to any goodwill generated by the franchisee;
  • details of any restraints of trade or similar clause under the agreement; and
  • any earnings information given by the franchisor must be attached to the disclosure document and accompanied by a requisite statement.
Application

Applies to disclosure documents given to franchisees on or after 1 November 2021.

Recommended steps

Franchisors should consider amending their disclosure document to include the additional information identified.

Franchisors should also consider attaching any relevant earnings information to the disclosure document.

 

Other key changes

Amending Regulation
Summary
Application and recommended steps
Insertion of new clause 4A

 

Dispute resolution

The dispute resolution process has been expanded. The Code now provides for disputes to be handled via conciliation and voluntary binding arbitration, in addition to the existing mediation model. Application

The new dispute resolution process applies to disputes notified on or after 2 June 2021 (applies to existing franchise agreements entered into before 2 June 2021)

Recommended steps

Franchisors should be aware of the new dispute resolution mechanisms under the Code.

Insertion of new clause 19A

 

Franchisor’s legal costs relating to franchise agreement

A franchisor cannot require the franchisee to pay part or all of the franchisor’s cost of legal services for the preparation, negotiation or execution of the agreement or related documents.

The franchisor can require the franchisee to pay a fixed amount before the franchisee starts the franchised business, provided that fixed amount is stated in the agreement as being the franchisor’s upfront legal costs (and not any future legal services that will or may be provided).

Application

Applies to franchise agreements entered into, extended or renewed after 1 July 2021.

Recommended steps

Franchisors should consider amending the form of their Franchise Agreements, extension and renewal documents to ensure they clearly identify upfront legal costs and do not require any payment of future legal costs.

Repeal and replacement with new clause 15

 

Financial statements for marketing funds and other cooperative funds administered by or for franchisor or master franchisor

A franchisor who administers marketing or other cooperative funds must prepare an audited annual financial statement for each financial year (within four months of the end of financial year).

A franchisor who administers marketing or other cooperative funds must open and operate a separate bank account for marketing funds.

Application

Applies to franchise agreements entered into, extended or renewed after 1 July 2021.

Recommended steps

Franchisors who administer marketing or other cooperative funds should ensure compliance with the new fund obligations.

Amendment of clause 23(1)(b)

 

Restraint provisions

A restraint clause will be of no effect after the end of the franchise agreement unless a franchisee was in serious breach of the franchise agreement immediately before the expiry of the franchise agreement.

Unfortunately, the concept of ‘serious breach’ has not been defined as yet.

Application

Applies to franchise agreements entered into, extended or renewed after 1 July 2021.

 

Repeal and replacement with new clause 30

Significant capital expenditure not to be required

A franchisor cannot require a franchisee to undertake significant capital expenditure.

The franchisor can require a franchisee to undertake the following excluded capital expenditure:

  • expenditure disclosed to the franchisee in the disclosure document before the franchisee executed, renewed or extended the agreement;
  • expenditure approved by a majority of franchisees;
  • expenditure incurred to comply with legal obligations; and
  • expenditure agreed by the franchisee.

Where excluded capital expenditure is included in the disclosure document, the franchisor must also disclose the following information:

  • the rationale for the expenditure;
  • the amount, timing and nature of the expenditure;
  • the anticipated outcomes and benefits of the expenditure; and
  • the expected risks of the expenditure.

The amendment also introduces an obligation on franchisors to discuss the expenditure with prospective franchisees prior to entering into, renewing or extending a franchise agreement.

Application

Applies to franchise agreements entered into, extended or renewed after 1 July 2021

and

New vehicle dealership agreements entered into, extended or renewed after 1 June 2020.

Recommended steps

Franchisors should consider amending the form of their Franchise Agreements, extension and renewal documents to ensure they do not provide for the franchisee to undertake significant capital expenditure that is not excluded under clause 30(2) of the Code.

Insertion of new clause 31A

 

Franchisor not to vary franchise agreement retrospectively and unilaterally

A franchisor cannot unilaterally vary a franchise agreement with retrospective effect without the franchisee’s consent. Application

Applies to franchise agreements entered into, extended or renewed after 1 July 2021.

Recommended steps

Franchisors should consider amending the form of their Franchise Agreements, extension and renewal documents to ensure that any unilateral retrospective variation right of the franchisor is removed.

Annexure 1

Extension of cooling off period

The cooling off period available to the franchisee after that franchisee enters into or makes a non-refundable payment under the franchise agreement is extended from seven to 14 days.

The cooling off period only begins on franchisees receiving all necessary documentation.

Application

Applies from 1 July 2021

Recommended steps

Franchisors should consider amending the form of their Franchise Agreements, extension and renewal documents to reflect the extended cooling off period.

 

Key changes relating to new vehicle dealership agreements

Note: The changes do not apply to all motor vehicle dealerships, but only to agreements for those dealerships that deal predominantly in new passenger vehicles or new light goods vehicles (or both).

Amending Regulation
Summary
Application
Insertion of new section 46A

Franchise agreement must provide for compensation for early termination

A franchise agreement must contain provision for compensation where the franchise agreement is terminated before expiry because the franchisor withdraws from the Australian market, rationalises its networks in Australia or changes its distribution models in Australia. This provision must specify how the compensation is to be determined including for lost profit, unamortised capital expenditure, loss of opportunity in selling goodwill and costs of winding up the franchised business.

A franchise agreement must contain provision for the franchisor to buy back or compensate the franchisee for new road vehicles, spare parts and special tools if the franchise agreement is not renewed or if the franchise agreement is terminated before expiry because the franchisor withdraws from the Australian market, rationalises its networks in Australia or changes its distribution models in Australia.

Application

Applies to new vehicle dealership agreements entered into, extended or renewed after 1 July 2021.

Recommended steps

Franchisors of new vehicle dealerships should consider amending the form of their Franchise Agreements, extension and renewal documents to provide for the new compensation and buyback rights.

 

Insertion of new section 46B

Franchise agreement must provide reasonable opportunity for return on franchisee’s investment

A franchise agreement must provide the franchisee with a reasonable opportunity to make a return on any investment required by the franchisor as part of the agreement. Application

Applies to new vehicle dealership agreements entered into, extended or renewed after 1 July 2021.

Recommended steps

Franchisors of new vehicle dealerships should consider whether their Franchise Agreements provide the franchisee with a reasonable opportunity to make a return on any investments required as part of the agreement.

 

 

If you would like any assistance with incorporating the above changes into your documents or further advice as to how the amended Franchising Code will affect you, please contact a member of our team.

This article was written with the assistance of Zoe Barton, Law Graduate.

Contact

Jacqui Barrett

Jacqui Barrett

Partner & Head of US Practice

In the corporate space, Jacqui regularly advises and assists client with mergers and acquisitions, corporate structuring, corporate compliance and...

Matthew Bridges

Matthew is a general commercial lawyer with more than 18 years’ experience covering a range of areas of practice...

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