The Franchising Code of Conduct is the legal instrument which sets out the rules and regulations for franchise owners across Australia. As of July 2021, the Australian government will implement a number of changes in order to address the current power asymmetry between franchisors and franchisees. The proposed changes stem from the Fairness in Franchising report which was delivered in August 2020. The Australian government have tabled an exposure draft, which outlines the likely changes to the existing laws. This article will outline some of the proposed changes and what they mean for business owners across Australia.
Franchise Information Statement Change
There has already been a small change to the Code, relating to the Annexure 2 – Information Statement. This section of the Code sets out the information which franchisors must give to potential franchisees at the earliest possible opportunity. This change took effect on the 12th of January 2021. This means that if you are a franchisor, you must now use the updated Annexure when providing franchise documentation to any prospective franchisees.
Capital Expenditure
Part of the proposed changes includes a clause which dictates that franchisors must not require their franchisees to undertake significant capital expenditure in relation to a franchised business. Under the clause, significant capital expenditure excludes:
- any expenditure that is disclosed to the franchisee in the disclosure document that is given to the franchisee before entering, renewing or extending the agreement
- expenditure that all or a majority of franchisees incur and approved by a majority of franchisees
- any expenditure incurred by the franchisee to comply with legislative obligations
- expenditure agreed by the franchisee
This means that as a franchisee, you cannot be pressured into undertaking significant forms of expenditure. This includes new renovations, new equipment or new machinery.
Franchise Early Exit
The new changes give franchisees the power to propose the termination of their franchise agreement via a written notice. This can take place at any time. There is no limit on what reasons can be provided by the franchisee. If the franchisor does not agree to the termination, they must include their refusal reasons in a written response. This must be provided within 28 days of receiving the initial notice. If this occurs, then franchisees are able to go to the usual methods of dispute resolution which are outlined by the Code.
Franchisor Disclosure Obligations
One of the major issues identified with the status quo relationship between franchisors and franchisees, is an information asymmetry. Therefore, the new changes include a number of new disclosure obligations which will be placed on franchisors. These changes include:
- the introduction of a Key Facts Sheet, which must be provided with the disclosure document.
- the disclosure of additional information concerning capital expenditure, marketing funds, rebates and revenue
- requiring the inclusion of the disclosure document within any franchise transfer, even if a franchise agreement in not required
Termination
The exposure draft continue to allow franchisors the right to terminate an agreement under the Code’s ‘special circumstances’ termination rights. However, franchisors must provide the franchisee with seven days notice and their reasons. If there is a dispute over the termination, all parties are able to refer the matter to methods of alternative dispute resolution such as mediation, arbitration or negotiation.
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Get startedCooling-Off Period for Franchisees
There are some changes to the current franchisee cooling off period. They include:
- extending the period from seven days to fourteen days
- applying the cooling-off period to transfers as well as new agreements
- applying it to any leasing documentation given by the franchisee
- starting the cooling period on the later of (instead of the earlier of) entry into an agreement or payment of money under an agreement.
Variation of Contract
Under the proposed changes, franchisors may not vary the agreement with retrospective impact unless the franchisee agrees to the variation. However, if a majority of franchisees who are affected by the change agree, this rule does not apply.
Legal Costs and Penalty Increases
The proposed changes mean that franchisors cannot make the franchisee pay all or part of the legal costs to prepare, negotiate or execute any contracts under the franchise agreement. There are some exceptions to this, if the agreement includes a specific dollar amount and is specifically outlined within a franchise agreement.
The new Code also doubles the penalties imposed on franchisors who are not compliant with the new regulations. A current penalty unit is $222, and the new changes increase the penalty to 600 units. This is a penalty of $133,200.
Conclusion
The changes discussed in this article will be in force from 1 July 2021, unless otherwise indicated. However, the legislation is still in a review phase which means that these are changes are not final and subject to change. There is some doubt as to whether the new laws will retrospectively apply to existing franchise agreements or only to agreements that are entered into after the new laws are implemented.
The impact of these changes will be significant, and franchisors need to start updating their agreements and disclosure documents to make sure they are operating within the new regulations. In order to conduct these changes, we recommend that you consult with Lawpath’s contract lawyers.
