Strengthened rights for franchisees in the automotive industry

By Jacqui Barrett and Rebecca Kazzi

New changes to the Franchising Code of Conduct have shaken up the automotive industry, with strengthened rights for franchisees when agreements are not renewed.

The contractual relationship between car manufacturers and new car dealers was put under the spotlight in the inquiry into the franchising sector, led by the Parliamentary Joint Committee on Corporations and Financial Services (Committee).

Following the Committee’s findings, the Franchising Code of Conduct (Code) has been amended specifically for the automotive sector.

In responding to the Committee’s findings, the Government recognised that automotive dealers often face large losses on stock or are required to expend significant capital which cannot be recouped in circumstances where their franchise agreement is not renewed.

As a result, from 1 June 2020, the Code has been amended as follows.

What’s changed?

• Franchisors are required to give 12 months’ notice in writing to franchisees of whether the franchisor intends to extend or renew the franchise agreement (if the agreement is for 12 months longer).
• Franchisors are required to give reasons for a franchisor’s decision not to extend or renew the agreement.
• A franchisor must not require a franchisee to undertake significant capital expenditure in relation to a franchised business during the term of the franchising agreement (where that expenditure has not been disclosed to the franchisee in the disclosure document given to the franchisee prior to entry into the agreement).
• Franchisor must include in a disclosure document as much information as practicable about significant capital expenditure, including the rationale for expenditure, amount, timing and nature of the expenditure and expected risks.
• Franchisors and franchisees are required to discuss the significant capital expenditure prior to entering into, renewing or extending the term or scope of the agreement.

The Code now includes obligations for the winding down of agreements. The parties must agree to a written plan of how the franchisee’s stock (including new vehicles and service equipment) will be managed over the remaining term of the agreement.

Why now?

Last year, we wrote about how the ‘Fairness in Franchising’ report, delivered by the Committee, recommended reforms to the automotive industry.

These recommended reforms included:

• manufacturers being required to provide at least 12 months’ notice when not renewing a dealership agreement;
• dealers not being compelled to upgrade the dealership after notice of non-renewal or termination has been issued;
• in the event of the non-renewal of a lease, the franchisor being mandated to buy back (at cost price) all vehicle parts up to three years old, with the cost of any independent valuation of stock to be split evenly between the franchisor and franchisee; and
• the Department of Treasury and Department of Jobs and Small Business ensuring that multiple codes applying to the industry remained aligned over time to avoid inconsistency.

The Government released its response to the Committee’s findings in August 2020.

Other reforms to the Code, which will apply to the franchising sector more broadly, will also impact on franchising relationships in the automotive industry.

Further information about the Government’s proposed reforms to the sector is available here.