New changes to the Franchising Code of Conduct

Amending Regulation

Summary

Application and recommended steps

Termination – cooling off after transferring 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.

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.

Franchisee may propose termination at any time

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.

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.

Termination

The immediate termination power has been replaced by a seven day notice period.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.

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.

Amending Regulation

Summary

Application and recommended steps

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.

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.

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.

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.

Amending Regulation

Summary

Application and recommended steps

Dispute resolution

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.

Franchisor’s legal costs relating to franchise agreement

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).

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.

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 open and operate a separate bank account for marketing funds.

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.

Restraint provisions

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

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

Significant capital expenditure not to be required

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.

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.

Franchisor not to vary franchise agreement retrospectively and unilaterally

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.

Extension of cooling off period

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

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.

Amending Regulation

Summary

Application

Franchise agreement must provide for compensation for early termination

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.

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.

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

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.