The new franchising code – beware of the changes

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There are changes afoot in the franchising industry and they will have a significant impact on the relationship between franchisor and franchisee.

There is no doubt that recent well publicised issues in the industry have led to the Government’s response to the Fairness in Franchising Report which was released in 2019.

The explanatory statement accompanying the amendments to the Franchising Code issued by the Minister for Employment, Workforce, Skills, Small and Family Business states:

The purpose of the Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (the Regulations) is to improve the fairness and transparency of the franchising sector. It furthers the overarching goal of the Competition and Consumer Act 2010 (the Act) to enhance the welfare of Australians by promoting competition and fair trading in the franchising sector and providing for the protection of parties who wish to enter into franchise agreements.

When do the franchising code changes apply from?

Most of the changes will affect any franchise agreement that is entered into, extended or renewed on or after 1 July 2021.

There are however some transition periods such as:

  1. Those relating to dispute resolution which will apply to a dispute which is notified on or after 2 June 2021 even if the franchise agreement was entered into, extended or renewed on or after 1 July 2021
  2. Many of the new regulations relating to the disclosure documents will be relevant to disclosure documents that are given after 1 November 2021

What are the franchising code changes?

Outlined below is a summary of the main changes to the franchising code:

Co-operatives are not franchises

The Code explicitly excludes any co-operatives registered under a state or territory law if the franchisor and franchise are both members of the same co-operative.

Dispute resolution

First and foremost, the parties must act in good faith.

The options for alternative dispute resolution have more alternatives and if agreement can’t be reached you can seek the appointment of an alternative dispute resolution practitioner.

If two or more franchisees have a dispute which is the same, they can request the franchisor to deal with them together.

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) or a Small Business Commissioner, if available in your state or territory, can be contacted to assist.

ASBFEO has the power to appoint alternative dispute resolution practitioners to conduct a mediation or conciliation and also to appoint arbitrators.

Extended cooling off period

The cooling off period has been increased to 14 days

Franchisee can terminate after receiving leasing information

A franchisee can terminate the franchise agreement within 14 days after receiving the proposed lease or terms of occupancy if it is a requirement of the franchise.

The franchisee can also terminate within 14 days after entering the lease or being granted a right to occupy if the terms offered by the franchisor were not substantially identical to the actual terms of the lease or right to occupy.

From 1 July 2021, there is a cooling off period of 14 days of the day when the franchise takes possession and control of the business.

Marketing funds

Advertising is no longer used and replaced with Marketing.

The marketing fund obligations apply to the party who administers the fund whether the franchisor, master franchisor of a third party authorised to administer the marketing fund.

There are significant penalties for any breaches.

New vehicle dealership agreements

Dealers operating as a manufacturer’s agent for new vehicle sales are now expressly protected by the Code.

Passing on legal costs

There must be transparency as to legal fees which can be passed on to franchisees.

A franchisor can seek the costs for the preparation, negotiation and execution of the franchise agreement as long as it is adequately specified.

Any legal costs legal costs must be specified in the franchise agreement.

Pre-entry disclosure information

Franchisors must give more information to the franchise and the must get it at least 14 days before they either:

  • enter into an agreement
  • make a non-refundable payment

The information must include:

  • Key fact sheets
  • Information regarding leases
  • Details of an existing franchise if being transferred
  • Disclosure of capital expenditure
  • The percentage of franchisees that participated in an alternative dispute resolution process or arbitration in the previous financial year
  • More detail around rebates and other financial benefits that franchisors receive from suppliers
  • Whether the franchisor or an associate has an interest in a lease that will be used for the operation of the franchised business
  • Whether the franchise agreement provides for the arbitration of disputes using the Code’s arbitration provisions
  • The ways in which the franchisee and the franchisor can terminate the agreement early
  • The franchisees’ rights to any goodwill they generate
  • Any restraint of trade obligations.

Restraint of trade clauses

Any restraint of trade clause will not be effective unless the franchisee was in serious breach of the franchise agreement

Retrospectively varying a franchise agreement

A franchisor can only alter or add terms to the franchise agreement which are retrospective if the franchisee consents in writing.

Terminating an agreement

The disclosure document must outline the circumstances in which the franchisor and the franchisee can terminate the agreement early.

If a franchisee proposes early termination, the franchisor must reply in writing within 28 days.

If the franchisor refuses to terminate, they must outline their reasons why.

A franchisor still retains the right to terminate an agreement without notice if the grounds are set out in the franchising agreement.

For a franchise agreement entered into, extended or renewed on or after 1 July 2021 the franchisor must give 7 days’ notice of the proposed termination and outline the particular grounds.

If the franchisee disputes the proposed termination the franchisor cannot terminate the agreement for 28 days after the notice of termination was given, but can require the franchisee to stop operating the business during this period.

Parties can ask ASBFEO to expeditiously appoint an alternative dispute resolution practitioner.

How can FC Lawyers help?

Our expert team has over 25 years’ experience assisting both franchisors and franchisees in a broad range of industries and profession.

Contact us to discuss your legal needs or if you have any questions regarding the new franchising code.

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