The Franchising Code (Code) has been amended, with many of the changes commencing on 1 July 2021.
The key changes affect:
- The process of granting new franchises;
- The contents of your Franchise Agreement;
- How you need to update your Disclosure Document.
You need to be doing the following to be compliant:
1. When granting a new franchise: You have to give the Information Statement before all other documents
When you grant a new franchise, you may have previously given the Information Statement to the new franchisee at the same time as the Disclosure Document, the Franchise Agreement and the other paperwork.
Now, the Information Statement has to be given prior to all of the other documents.
2. When granting a new franchise: You have to give a “Key Facts Sheet”
A new “Key Facts Sheet” will be in a form to be published on the ACCC website (it isn’t published yet – as at 07.06.2021). It will be a document that gives a brief overview of key facts from the Disclosure Document.
3. When granting a new franchise: You will need to disclose your interest in any relevant leases
If you or any associate (think of directors and shareholders of the franchisor) have an interest in any lease to be entered into for the franchise, the interest will need to be disclosed in a separate document, which must be provided with the Disclosure Document.
4. Your Disclosure Document will have to disclose mediation or ADR process that you’ve had with franchisees
In addition to the requirement to disclose litigation, you will now have to disclose the percentage of franchisees in your system who engaged in mediation, conciliation or arbitration processes with you in the prior financial year (regardless of who initiated the process).
5. Your Disclosure Document will have to disclose details of rebates
You now have to include details of the rebate you will receive from a supplier of goods or services to the franchisee. At a minimum, you’ll need to specify the nature of the rebate, the name of each business providing the rebate, and the total amount of rebates received in the previous financial year.
You will also have to outline whether the rebates are shared, directly or indirectly, with the franchisee and if so, the method for working out how it is shared referencing percentages where the context requires.
A rebate includes any financial benefit the franchisor receives from a supplier.
6. Restrictions on requiring Franchisees to incur ‘significant capital expenditure’
You will not be permitted to direct a franchisee to incur significant capital expenditure during the term of the franchise agreement unless the expenditure is disclosed in the Disclosure Document that is given to the franchisee before entering into the Franchise Agreement, or renewing or extending the Franchise Agreement. There are some exceptions to the rule – see section 30 of the Code.
‘Significant capital expenditure’ is not well defined in the Code, so it may be a topic of debate given the grey area that has been left. We envisage that, for example, it would include a substantial refit of a premises, but wouldn’t include the cost of replacing an air conditioner. Each case will depend on the circumstances of the particular franchise.
7. Your Disclosure Document will have to include details of ‘significant capital expenditure’
The Disclosure Document will have to include as much information as practicable about the expenditure, including the following 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 associated with the expenditure.
As an example, the information could include the type of any upgrades to facilities or premises, and indicative costs for any building materials.
Before entering into, renewing or extending the term or scope of the agreement, the franchisor and the franchisee or prospective franchisee must discuss the expenditure. The discussion must include a discussion of the circumstances under which the franchisee or prospective franchisee considers that the franchisee or prospective franchisee is likely to recoup the expenditure, having regard to the geographical area of operations of the franchisee or prospective franchisee.
8. Cooling off periods will be extended from 7 to 14 days
Your new franchisee can terminate the franchise during the cooling off period. If they do so, they are entitled to a refund of all money paid, except for your reasonable expenses if the expenses are set out in the Franchise Agreement.
The cooling off period is being extended to 14 days (previously it was 7 days). The time starts when the franchisee has been given all of the documents. Where you or an associate (think directors and shareholders) will lease or license the premises to the franchisee, the period starts when you give the franchisee the document containing the lease or license terms.
9. Restriction on recovery of Franchisor’s legal costs
You will only be able to pass on the legal costs for the preparation, negotiation and executing of the Franchise Agreement where it is for a fixed dollar sum, specified in the Franchise Agreement, is stated as being for the franchisor’s costs of legal services relating to preparing, negotiating or executing the agreement and is stated as not including any amount for legal services that will be provided after the Franchise Agreement is entered into in relation to preparation of other documents.
10. Early termination of the franchise – franchisee requests
Your franchisees can now request an early termination of their Franchise Agreement. You must respond with 28 days with a substantive response on the proposal. The response must meet certain standards in the new Code. Franchisees may make subsequent requests for early termination provided the proposal sets out different reasons(s) from the reason given earlier. A failure to agree activates the dispute resolution provisions.
11. Early termination of the franchise – by the franchisor
You must now provide a franchisee with 7 days’ notice if you intend on terminating the Franchise Agreement on the grounds which were previously deemed ‘special circumstance’ events (eg. where the franchisee abandons the franchise, is convicted of a serious offence, etc).
The notice gives an opportunity for your franchisee to dispute the proposed termination and in doing so prohibit you from being able to terminate the agreement until 28 days after notice was provided. You will be able to require franchisees not to operate all or part of the franchised business, provided the Franchise Agreement gives you this right and you have served a notice to that effect on your franchisee.
We recommend you update your suite of franchise documents to accord with these changes. For your Disclosure Document, there are various incidental updates which are not referenced in this summary. To ensure your Disclosure Document is compliant with the updated Code, use Annexure 1 from an up to date version of the Code – available here: https://www.legislation.gov.au/Details/F2021C00037.