They’re Here! Changes to the Franchising Code Announced

After 3 years, spanning a national inquiry and heavy consultation with the franchising sector, changes to the Franchising Code of Conduct have finally been announced. ?✨

The Important Stuff

• Most changes will apply to franchise agreements entered into, extended or renewed from 1 July 2021
• Changes which require amendments to a franchisor’s disclosure document apply from 1 November 2021
• Franchisors must provide a new “Key Fact Sheet” to prospective franchisees 14 days before they enter into a franchise agreement. The Key Fact Sheet must be in a prescribed form, which will be published on the ACCC’s website once available
• The Information Statement (which the franchisor already needs to provide to prospective franchisees) has also been updated – and looks much more user-friendly!

The Key Changes

Disclosure Requirements

The disclosure requirements under the Code have been bolstered.

A franchisor must provide the following at least 14 days before entering into a franchise agreement or accepting a non-refundable payment (in addition to the franchise agreement, Code and disclosure document):

• a Key Facts Sheet
• if the franchisor holds the lease, a copy of the lease and any disclosure statement

Franchisors must now create and maintain a Key Facts Sheet. The form of the Key Facts Sheet will be published on the ACCC website. The Key Facts Sheet needs to be updated within 4 months after the end of each financial year. It will essentially act as a “snapshot” of the disclosure document.

Where there is a transfer of a franchise agreement, a franchisor must give the prospective transferee a copy of the same documents above, as well as a copy of the existing franchise agreement to be transferred, at least 14 days before the franchisor gives their consent to the transfer.

Prospective franchisees can now request franchise documents be provided to them in printed form, electronic form or both, and the franchisor must comply with the request.

If a franchisor gives a prospective franchisee earnings information after the 14 day disclosure period has already started, the 14 day disclosure period restarts. This is intended to address circumstances in which earnings information is provided outside of the formal disclosure process.

As mentioned, the Information Statement has been updated and is much more reader-friendly and visually appealing. The Code has also been changed so that franchisors must provide the Information Statement before franchise documents are issued (at the recruitment phase).

✅ What you need to do:

1. Once the template is available, create a Key Facts Sheet before 1 July 2021
2. Update your internal processes to make sure you are complying with the disclosure requirements.
3. Make sure you give franchisees the Information Statement as early on in the recruitment process as possible

Capital Expenditure

Currently, a franchisor can require a franchisee to undertake a significant capital expenditure if the franchisor considers it necessary as a capital investment in the franchised business, justified by a written statement given to the franchisee. This exception has now been removed, meaning a significant capital expenditure can only be required in the following circumstances:

• expenditure that is disclosed to the franchisee in the disclosure document
• if expenditure is to be incurred by all or a majority of franchisees, expenditure approved by a majority of those franchisees
• expenditure incurred by the franchisee to comply with legislative obligations
• expenditure agreed by the franchisee

The disclosure requirements on capital expenditure have also been strengthened. A franchisor must not only disclose the estimated capital expenditure, but also the:

• rationale;
• amount;
• timing;
• nature;
• anticipated outcomes;
• benefits; and
• expected risks,

of the expenditure. A franchisor must also discuss the potential expenditure with the prospective franchisee.

✅ What you need to do: consider any likely significant capital expenditures, and make sure these are fully disclosed in your disclosure document. Update your processes to include a discussion of this expenditure with prospective franchisees.

Marketing Funds

The main change to the marketing fund provisions is the introduction of penalties (300 penalty units) for misuse of the marketing fund.

This is intended to deter the misuse of marketing funds and ensure greater franchisor accountability.

✅ What you need to do: if you’re already doing the right thing – nothing!

Legal Costs

Typically, franchise agreements have contained broad obligations requiring franchisees to pay the franchisor’s legal costs for the franchise agreement and other associated documents.*

This is now prohibited, and any legal costs for the preparation, negotiation and execution of the franchise agreement must be specified in the franchise agreement as a fixed amount.

The franchisor cannot pass on legal costs for documents required after the franchise agreement is entered into. This includes breach notices.

*Shameless plug – at Legalite, all of our franchise agreements ensure a fixed amount are specified.

✅ What you need to do: amend your franchise agreement to make sure your legal costs for preparing, negotiating and executing the franchise agreement are a fixed amount. Remove any ability to pass on legal costs for other documents required after the agreement is entered into.

Cooling-Off Rights

A franchisee’s right to “cool-off” has been extended from 7 days to 14 days.

Franchisees also now have a right to cool-off after entering into a lease or an occupancy licence with the franchisor. There is a further 14 day cooling off period that applies if the final terms of the lease or occupancy licence are not substantially identical to the proposed terms.

Quite significantly, cooling-off rights are now extended to transfers of an existing franchise agreement (whereas these were excluded under the current Code). A transferee can now cool-off within 14 days of becoming the new franchisee or taking possession of the business (whichever is earlier), and effectively require the old franchisee to “take back” the business. This is quite a concerning change, as it means a sale of business can be unwound after settlement.

✅ What you need to do: update your franchise agreement to extend the cooling-off period to 14 days and include cooling-off rights for transfers.

Termination

A franchisee now has the right to propose an early termination at any time, and the franchisor must provide a response with 28 days. If the franchisor refuses to terminate, it must provide substantive reasons why. Aside from the 28 day time-limit, this change doesn’t achieve much more than what happens in practice anyway. Parties have always had the option of negotiating an early exit on commercial terms.

The grounds for immediate termination under the Code (eg. voluntary abandonment, insolvency) remain, but a franchisor must now give a franchisee 7 days’ notice of the termination. This new timeframe is to allow franchisees an opportunity to contest the termination and commence dispute resolution proceedings.

If a franchisee contests the termination, the franchisor must not terminate the agreement until 28 days after the notice was given. However, if the continued operation of the business by the franchisee might pose a risk to third parties (eg. if there is a health and safety concern), then the franchisor can require the franchisee not to operate the franchised business.

✅ What you need to do: update the termination provisions in your franchise agreement to reflect the changes to termination rights

Dispute Resolution

The Australian Small Business and Family Enterprise Ombudsman will now have the function of managing disputes under the Code (previously held by the mediation adviser).

Dispute resolution options have also been expanded to include conciliation and arbitration.

In addition to mediation, parties can refer a dispute to conciliation (the difference being that a conciliator can give advice to the parties). From there, the dispute resolution process is largely the same as under the existing Code. However, if the parties to a dispute don’t attend the dispute resolution, they will face a civil penalty provision.

Parties can also agree to resolve a dispute by arbitration. This agreement can be in the franchise agreement itself or by separate agreement.

A significant change is the introduction of clauses allowing multiple franchisees to conciliate or mediate their claims together if they have a similar dispute with the franchisor. Franchisees can discuss their disputes with each other, despite any confidentiality requirements provided in their franchise agreements.

Interestingly, the new Code says that each of the disputes remain separate, even if there is a single dispute resolution process dealing with all of them. This means that even though the disputes may be dealt with together, different outcomes can be reached for individual franchisees.

✅ What you need to do: update your franchise agreement from 1 July 2021 to reflect the new dispute resolution processes and allow for conciliation and arbitration.

The Disclosure Document

Various changes and additions to the items in the disclosure document have been made. Franchisors must make these changes by 1 November 2021. Changes include:

Item 4 – Dispute Resolution

The percentage of franchisees in the franchise system that were a party to a mediation, conciliation or arbitration process that was conducted, or was pending, in the previous financial year.

Item 10 – Rebates

• The nature of a rebate or other financial benefit received from a supplier
• The total amount of rebates or other financial benefits received in the previous financial year from each supplier. This must be expressed as a single aggregate percentage of total group purchases from that supplier. However, this does not need to be disclosed if the franchisee is allowed to acquire goods or services from alternate suppliers without the franchisor’s approval, or if the rebate will be returned to the franchisee by way of a contribution into a marketing fund
• If a rebate or other financial benefit is shared (directly or indirectly) with a franchisee, the method for working out how much of the rebate is retained by the franchisor and how much is shared with the franchisee. This must be described by a percentage of the rebate, and a description of each direct and indirect benefit received by the franchisee

Item 13 – Leases

Whether the franchisor has an interest in a lease relating to the franchised business.

This is intended to put franchisees on notice of any incentives or financial benefits that the franchisor is entitled to receive by virtue of a lease, so we would suggest that any landlord incentive or contribution be disclosed under this item.

Item 18 – Goodwill and Restraint of Trade

• Whether or not a franchisee has any rights to goodwill generated by the franchise
• Whether the franchise agreement contains a restraint of trade clause

✅ What you need to do: make sure your disclosure document is up to date with the new form by 1 November 2021

And there are the key changes – phew! We will be working with our clients to make sure your franchise agreement and processes are up to date by 1 July 2021, and then work towards updating your disclosure document by 1 November 2021. If you have any questions or need any help, feel free to contact us at [email protected].