Franchising code changes announced – the time to be ready is now!

Much anticipated amendments to the Franchising Code of Conduct have been released by the Australian Government. Announced on 1 June, the amendments include key changes related to disclosure, cooling-off periods, penalties for breach of payment obligations for marketing funds and dispute resolution provisions.

The amendments follow the Australian Government’s response to a parliamentary inquiry into the effectiveness of the Code, changes to the Code for car dealerships and sector consultation, as well as the establishment of a Franchise Disclosure Registry, announced in mid-May by The Hon Stuart Robert MP (paragraph 17).

Many of these changes will impact agreements entered into, renewed, or extended on or after 1 July, 2021 however some changes differ in timing. Of importance are the changes made to the dispute resolution provisions which took effect 2 June 2021, a mere 24 hours after the amended Code was released. With under a month to go for many of these amendments to come into force, here’s what you need to know.

Changes to disclosure requirements

Additional disclosure requirements relating to supplier rebates, leases, capital expenditure and end of term arrangements will be in force, to increase transparency for franchisees.

Information statement
The Code has now made it abundantly clear that the information statement must now be provided to prospective franchisees prior to the provision of any other documents including the disclosure document and or the franchise agreement.

Key fact sheet
A mandatory key facts sheet will also be introduced for franchisors – which will essentially be a summary of the disclosure document and must be provided to franchisees along with the disclosure document and relevant franchise documentation. Failure of a franchisor to do so, now attracts civil penalties. The Key Fact Sheet will need to be updated within four months of the end of the financial year in the same way as the annual disclosure document.

Disclosure of disputes
In addition to litigious disputes which franchisors are still required to disclose, franchisors will now be required to disclose the percentage of franchisees in their system which were a party to any alternative dispute processes in the previous financial year.

Supplier rebates
The highly anticipated amendments to disclosure of rebates will also come into effect with franchisors now required to disclose whether they receive a rebate from a supplier and if so, details of the benefit. Rebates are to be expressed as a percentage of total purchases for the franchise system (excluding corporately run stores) from a particular supplier and franchisors will need to specify whether the benefits will be shared with franchisees and how. The amended Code exempts franchisors from needing to disclose this information if the franchisee is permitted to source goods or services from sources and do not require the franchisor’s approval to do so, or where the rebate or financial benefit is paid or returned directly to the franchisee or via a cooperative fund.

Leasing arrangements
Franchisors will now need to disclose whether there are any interests in a particular lease arrangement for the franchise whether it be as landlord or head leasee.

Earnings information
In the event which earnings information are provided to prospective franchisees, the information must now be provided with the disclosure document and where earnings information is provided the disclosure document is to contain a statement that to the best of the franchisor’s knowledge, the earnings information is accurate. It is important to note the 14 day disclosure period will now commence from the date all information, including earnings information, is provided by a franchisor.

Capital expenditure
Amendments to the provisions relating to significant capital expenditure have now been made to be in line with the changes made recently to automotive franchise systems. For a franchisor to now require a franchisee to undertake significant capital expenditure during the term, the franchisor:

• must have disclosed the expenditure at the time the franchise agreement was entered, renewed or expanded;
• must obtain approval from a majority of its franchisees;
• must require the expenditure in order to comply with its legal obligations; or
• must obtain the agreement of the franchisee who is required to incur the expenditure.

Franchisors will need to ensure they discuss with prospective franchisees prior to entry into the franchise agreement, that capital expenditure is likely to be incurred and the circumstances under which the franchisee is likely to recoup such costs.

Increased avenues for dispute resolution

The amendments increase dispute resolution avenues for franchisors and franchisees through:

• New conciliation and voluntary arbitration code dispute resolution mechanisms
• Moving functions undertaken by the Franchising Code Mediation Adviser to the Australian Small Business and Family Enterprise Ombudsman. The Ombudsman will also have responsibility for arbitration and conciliation. The Ombudsman, Bruce Billson, has welcomed the amendments, stating that they “will help level the playing field across the franchising sector… addressing the power imbalances that often exist between franchisees and franchisors, particularly when disputes arise”
• Multi-franchisee dispute resolution processes will be available. Franchisors will be obligated to attend

Lengthier cooling-off periods

Cooling-off periods have now been extended to 14 days from the previous seven days and amendments have been made to the events which trigger the commencement of this period. Franchisors should note the cooling-off period now does not commence until all necessary information has been received by the franchisee. Of importance is the ability of a franchisee to now cool-off after receiving the terms of the proposed lease or occupancy right. In the event that the final lease is not substantial identical to the proposed lease provided with the initial disclosure to the franchisee, franchisees will now have a further 14 days to cool-off from receipt of the new proposed lease.

Purchases of existing franchises from vendor franchisees will be subject to the cooling-off provisions which expire at the earlier of:

• 14 days from the day after becoming the franchisee, or
• Once the incoming franchisee takes possession and control of the franchised business.

The Code details the mechanism for incoming franchisees to cool-off and the repayment of monies by an outgoing franchisee and the franchisor.

Applications for early termination

Amendments have also been made to enable franchisees to request an early termination of their franchise agreement. Franchisors must respond with 28 days with a substantive response on the proposal including the reasons for the refusal. Franchisees may make subsequent requests for early termination of their franchise agreement provided the proposal set out different reasons(s) from the reason given earlier. Failure by the parties to agree to an early termination of the franchise agreement may give rise to a dispute.

A franchisor must now provide a franchisee with seven days’ notice if terminating the agreement on the grounds which were previously deemed special circumstance events.  The notice is intended to provide franchisees with an opportunity to dispute the proposed termination and in doing so prohibit the franchisor from being able to terminate the agreement until 28 days after notice was provided. Franchisors may require franchisees not to operate all or part of the franchised business, provided the franchise agreement provides the franchisor with this right and the franchisor has served a notice to that effect on the franchisee.

Clauses and penalties for marketing funds

Changes have been made to clauses for marketing funds to ensure consistent terminology and remove the discrepancies which existed between what was considered advertising verse marketing. The amended Code has also now placed obligations on the fund administrator, whether it be the franchisor, master franchisor or associate. Civil penalties will now apply to fund administrators who fail to maintain a separate bank account, fail to make payments for any units which are operated by the franchisor on the same basis as franchisees and failed to use the funds for the purposes set out in the disclosure documents and or the Code.

Legal costs for franchisors

Legal costs associated with the preparation, negotiation and execution of a franchise agreement must be clearly documented as a fixed amount in the franchise agreement. Franchisors will be prohibited from passing on future legal costs associated with the agreement in instances where the costs are indeterminate at the time of signing or where they relate to the preparation and execution of other documents.

Retrospective variations to franchise agreements prohibited unless the franchisee agrees to them

Retrospective variations to franchise agreements are invalid unless consented to by the franchisee.

Restrictions on restraints of trade

Restraint of trade provisions are enforceable now only in instances where a serious breach of the franchise agreement has occurred by a franchisee.

Provisions around new vehicle dealership agreements

Provisions apply to agents of new vehicles who sell on behalf of manufacturers and support fair compensation of franchisee automotive dealers.

In summary

Franchisors need to ensure franchise agreements and processes have been reviewed and updated by 1 July, 2021. Disclosure documents must be reviewed and updated by 1 November, 2021.  Dispute resolution provisions take effect for all disputes which arise from 2 June 2021, even if the franchise agreement was entered into prior to that date.

For more information or for assistance with reviewing and updating your franchise agreement and disclosure document, please contact the Macpherson Kelley Franchising team.

^{_{Published 4 June 2021
This article was written and supplied by Racha Abboud from Macpherson Kelly}}