Important changes to the Franchising Code effective 1 July 2021 - Do your franchising arrangements comply with the recent amendments?
On 1 June 2021, the Federal Government released amendments to the Franchising Code of Conduct (the Code).
The amended Code will place heavier burdens on Franchisors in an effort to level the playing field for Franchisees.
The amendments are contained in the Competition and Consumer (Industry Codes - Franchising) Amendment (Fairness in Franchising) Regulations 2021 (the Regulation).
When will the changes take effect?
The amendments surrounding dispute resolution commenced on 2 June 2021, with the balance of the amendments applying from 1 July 2021 or 1 November 2021 in the case of changes to disclosure documents. Whilst most of the changes only apply to franchise agreements entered into, renewed or extended on or from 1 July 2021, some of the changes also apply to existing agreements.
What are some of the key changes?
Dispute resolution and complaints handling
From 2 June 2021, the Australian Small Business and Family Enterprise Ombudsman has been granted the power to mediate, conciliate and arbitrate disputes between Franchisors and Franchisees. There is an obligation for the Franchisor to attend such dispute resolution processes. Penalties apply for non-compliance.
The new dispute resolution process applies to existing franchise agreements.
Capital expenditure
From 1 July 2021, the circumstances under which Franchisors can require Franchisees to incur significant capital expenditure will be limited. Franchisors can no longer rely on a business justification statement before imposing an obligation on Franchisees to incur a significant capital expense unless it is included in a disclosure document. As a result, Franchisees will only be liable for significant capital expenditure where:
the Franchisor has disclosed the required significant capital expenditure in the disclosure document at the time the franchise agreement was entered into, renewed or expanded;
the Franchisor has received the approval from a majority of Franchisees if the expenditure affects all or a majority of the Franchisees in the franchise system;
the Franchisor has obtained approval of the individual Franchisees affected; or
such expenditure is required to comply with legislative requirements.
Franchisors will have the obligation to supply prospective Franchisees with as much information as practicable about the significant capital expenditure prior to a prospective Franchisee entering the franchise agreement, including:
the rationale of the expenditure;
the amount, timing and nature of the expenditure;
the anticipated outcome and benefits of the expenditure; and
the expected risks associated with the expenditure.
There will also be an obligation on Franchisors to discuss the expenditure with Franchisees prior to entering into, renewing or extending a franchise agreement.
Marketing funds
From 1 July 2021, the requirements surrounding marketing funds will be tightened. Franchisors will be required to:
prepare an audited annual financial statement for each financial year (within four months of the end of the financial year); and
open and operate a separate bank account with respect to the marketing funds it receives.
Failure to comply with these provisions may result in civil penalties being imposed on the Franchisor.
Early exit and termination
From 1 July 2021, the cooling-off period for Franchisees to terminate a franchise agreement will be extended from 7 days to 14 days.
A 14 day cooling off period will also apply to Franchisees who purchase an existing franchise.
With respect to leases of the business premises, where the Franchisee is to lease the business premises from the Franchisor or an associate of the Franchisor and that lease is not yet in force:
the Franchisee may terminate the franchise agreement 14 days after receiving the proposed lease; and
a further 14 day cooling off period will apply if the final lease is not substantially identical to the initial proposed lease terms.
In addition, a new provision will allow Franchisees to serve a proposal on Franchisors for the early termination of a franchise agreement. The proposal must be in writing and set out the reasons for the proposed termination. Franchisors who receive such a proposal will have 28 days to provide a substantive written response, including reasons if the Franchisor refuses to terminate. An obligation of good faith applies.
Franchisor's legal costs
From 1 July 2021, Franchisors cannot force Franchisees to cover all of the Franchisor's legal costs in relation to the franchise. Franchisors will be allowed, however, to pass on quantifiable legal costs to Franchisees provided these costs are specified in the franchise agreement and fully disclosed.
Terms
From 1 July 2021, Franchisors are prohibited from unilaterally varying the franchise agreement with retrospective effect unless the Franchisee provides written consent.
Restraint of trade
From 1 July 2021, if a Franchisee was not in serious breach of the franchise agreement (immediately before the expiry of the franchise agreement), any restraint clause has no effect on the Franchisee after the end of the franchise agreement.
Disclosure
There have been several changes to Franchisors' disclosure obligations which will require Franchisors to revise their pro forma disclosure documents to ensure compliance with the new laws.
For example, from 1 November 2021, Franchisors will be required to provide more specific disclosure on certain matters including:
the percentage of Franchisees that have been party to some form of alternative dispute resolution process;
supplier rebates;
interests in lease arrangements;
the term and early termination arrangements; and
the rights of Franchisees to goodwill.
In addition, from 1 July 2021, Franchisors will need to provide to Franchisees:
a new form of Information Statement (which must be provided to Franchisees before the other disclosure documents); and
a new Key Facts Sheet which summarises key information from the disclosure document. The required form of Key Facts Sheet has not yet been made available.
How can we help?
If you or your client operates a franchise in Australia, it is time to review your franchise agreements, disclosure documents and other transaction documents.
If you require any advice or assistance regarding your franchise, please contact our Commercial Team before you are caught out by the ACCC for non-compliance.
The material in this article was correct at the time of publication and has been prepared for information purposes only. It should not be taken to be specific advice or be used in decision-making. All readers are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Brown Wright Stein Lawyers excludes all liability relating to relying on the information and ideas contained in this article.
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Amanda Comelli
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