In brief - Amendments to the Franchising Code of Conduct (Code) aimed at addressing identified power imbalances between franchisees and franchisors will commence on 1 July 2021
The amendments will affect the process of granting new franchises, the contents of franchise agreements and associated franchise disclosure documents.
What do the changes mean for franchisors and franchisees?
Franchisors should immediately take steps to update their standard disclosure documents, franchise agreements and compliance manuals to accord with changes to the Code commencing on 1 July 2021 to avoid potential penalties (which have increased). Franchisors should also consider how the amendments may impact their existing franchise arrangements and the extent to which additional disclosure is required.
Notably though, there is a transition period. Amendments requiring a franchisor to change their disclosure document only apply to documents to be given on or after 1 November 2021 - broadly, when many franchisors would be updating their disclosure document anyway.
Franchisees should familiarise themselves with the amendments to the Code and their potential impact on future dealings with the franchisor.
Some key changes to the franchising code of conduct
Franchisee capital expenditure
Following the amendments, franchisors may not direct franchisees to incur significant capital expenditure unless the expenditure is:
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disclosed to the franchisee in the disclosure documents; or
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to be incurred by all or a majority of franchisees and is approved by a majority of those franchisees; or
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incurred by the franchisee to comply with legislative obligations; or
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agreed by the franchisee.
It is no longer sufficient that a franchisor considers the relevant capital expenditure to be a necessary capital investment.
What constitutes significant capital expenditure is not defined in the Code and may be fertile ground for dispute. Also, a franchisor will not be able to rely on the pre-disclosure exception unless there have been specific disclosures in the disclosure document given to the franchisee before entering into, renewing or extending the franchise agreement.
If a disclosure document discloses a requirement or potential requirement for a franchisee to incur significant capital expenditure, then it must include as much information as practicable about the expenditure, including:
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the rationale for the expenditure;
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the amount, timing and nature of the expenditure;
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the anticipated outcomes and benefits of the expenditure; and
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the expected risks associated with the expenditure.
Termination
Franchisee termination proposals
At any time after 1 July, a franchisee will be able to give the franchisor a written proposal for early termination of their franchise agreement. The proposal must set out the reasons for the proposed termination, however, the Code does not stipulate what reasons may or may not be acceptable. The franchisor must provide a substantive response within 28 days. If the franchisor’s response is to refuse the proposal to terminate, the response must include the reasons for the refusal.
This provides an explicit avenue to commence negotiations, but it does not give a franchisee a right to exit on demand. The Code acknowledges that if the franchisor refuses to terminate the franchise agreement, a dispute may arise which will need to be handled in accordance with the usual dispute resolution process set out in Division 3 of Part 4 of the Code.
A franchisor does not have to respond to second or subsequent proposals on the same basis.
It is important to remember that franchisees and franchisors remain subject to the overarching good faith obligation provided in Section 6 of the Code in all dealings between them, including for any termination proposal or subsequent dispute. Exactly what that is going to require of a franchisor faced with early termination proposal, though, is unclear. However, the amendments specifically anticipate that an early termination proposal is not expected to always lead to an agreement to terminate.
Franchisor termination in "special circumstances"
Section 29 of the Code will still permit franchisors to terminate a franchise agreement early if one of the "special circumstances" listed there occurs in respect of the franchisee. However, after 1 July 2021, the Code will require a franchisor to give the franchisee seven days' notice of the proposed termination and the particular "special circumstances".
If the franchisee gives the franchisor notice that it disputes the franchisor's proposed termination within the seven-day notice period, the franchisor is prohibited from terminating the franchise agreement until after 28 days from when the notice was first given, to allow for referral to conciliation or mediation.
Cooling off
The franchisee cooling off period has been extended from 7 to 14 days and now commences on the later of (rather than earlier of) entry into the franchise agreement or payment of money under that agreement.
A substitute franchisee purchasing from an existing franchisee, will now also have the benefit of the cooling off provisions.
Commercially it now seems appropriate for franchisors to look for a purchaser or incoming franchisee to enter into a new franchise agreement, and there needs to be full disclosure.
Unilateral variation
A franchisor will not be able to unilaterally vary the terms of the franchise agreement with retrospective effect, without the prior written consent of the franchisee.
Additional disclosure obligations
Franchisors now need to disclose additional information to franchisees or prospective franchisees in their disclosure documents, which will need to be adjusted to accommodate the new requirements. In particular, additional disclosure is required in relation to:
1. Dispute resolution
A disclosure document must now disclose the percentage of franchisees in the franchise system that were a party to some form of alternative dispute resolution process.
It must also disclose whether the franchise agreement provides for the resolution of disputes through arbitration and must summarise what is set out in the franchise agreement regarding the parties' rights to end the franchise agreement early.
2. Capital expenditure
As noted above, a disclosure document must now include as much information as practicable about significant capital expenditure requirements, including the particular specified information.
3. Rebates
Franchisors now need to disclose expanded details of any rebate or financial benefit which they might receive from a supplier in connection with the supply of goods or services to the franchisee, including:
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the nature of the rebate or financial benefit;
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the name of each of the businesses providing the rebate or benefit;
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the total amount of rebates or other benefits received in the previous financial year from each supplier; and
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whether the rebate or benefit is shared directly or indirectly with the franchisee and if so, the method used to determine how sharing occurs, including a description of each direct and indirect benefit received by the franchisee.
There are exemptions around disclosing payments made by the franchisee to the franchisor for the supply of goods or services and lease incentives are not required to be disclosed here – although that is only because they have to be disclosed elsewhere in the disclosure document under enhanced leasing disclosure requirements.
4. Leases or sub-licence leases to franchisees
A franchisor or associate's interest in any lease or sub-licence lease to be entered into for the franchise also now needs to be disclosed in both a separate document and with the disclosure document itself.
5. Goodwill
There must also now be disclosure as to whether or not a franchisee has any rights to goodwill generated by the franchise.
6. Restraint of trade clause or similar
A franchisor must now also disclose any restraint of trade clause or similar relating to periods after conclusion of the franchise agreement.
7. Earnings
If the franchisor proposes to give earnings information, then that must be either in the disclosure document or in a separate attachment (and if given to a prospective franchisee earlier, must be repeated in the disclosure document). In addition, a franchisor providing earnings information in a disclosure document must now sign off to a specific statement that the information given is accurate.
Information statements
Franchisors must continue to ensure that the (updated) information statement (from the ACCC website) is provided to a prospective franchisee as soon as practicable after the prospective franchisee formally applies or expresses an interest and, in any event, before all other disclosure documents.
The new "Key Facts Sheet"
Franchisors are now also required to give a "Key Facts Sheet" in the form prescribed on the ACCC's website. Franchisors must provide the Key Facts Sheet to prospective franchisees at least 14 days before entering into a franchise agreement or paying any non-refundable money.
Lease details
If the franchisor or an associate leases premises that are to be sublet to the prospective franchisee, then a copy of the lease (or a summary of the commercial terms if the lease is unavailable) must be provided in addition to any written information in connection with the lease required by state or territory law.
If the full lease details are not provided with the disclosure document, the cooling off period does not start to run.