The Three Biggest Changes to the Franchising Code
Quest Legal Associate James Bijen shares with us the three biggest changes to the Franchising Code and what it means for franchise businesses from 1 July 2021. See our article below for the full details on the Code changes.
Amendments to the Franchising Code of Conduct
Numerous changes to the Franchising Code of Conduct (“the Code“) have now been implemented as of 1 July 2021. These amendments are designed to address a perceived power imbalance between franchisors and franchisees and increase franchisor conduct standards. An overview of the significant changes to the Code are as follows:
1. New Disclosure Requirements
Key Facts Sheet
a) Franchisors must provide a Key Facts Sheet (in the form published by the Australian
Competition and Consumer Commission (ACCC)) to the franchisee 14 days prior to
entering into, transferring, renewing or extending the term or scope of a franchise
agreement.
b) The Key Facts Sheet must be updated within 4 months of the end of each financial
year.
c) The Key Facts Sheet can be found here.
Disclosure Document and Information Statement
a) Disclosure Documents provided on or after 1 November 2021 will require more
extensive details of supplier rebates and other financial benefits, including the nature
of each rebate, the name of the business providing it, the amount of rebates received,
if the rebates are shared with franchisees and the method for working out how much
is shared.
b) Franchisors must provide a Disclosure Document to a prospective franchisee or
prospective transferee of an existing franchise agreement at least 14 days before
entering into the agreement or the franchisor gives consent to the transfer.
c) The form of the Information Statement has changed effective 1 July 2021.
d) Franchisees may now request documents in printed form, electronic form or both.
2. Franchise Agreement Prohibitions
a) Legal Costs: Franchisors are prohibited from requiring franchisees to pay all or part of
the franchisor’s legal costs associated with the franchise agreements unless the costs
are for a determined fixed amount that is specified in the franchise agreement prior
to signing.
b) Capital Expenditure: Franchisors are prohibited from requiring franchisees to
undertake significant capital expenditure during the term of the franchise agreement
unless this has been disclosed in the Disclosure Document or where it is required by
law or is agreed to prior by the franchisee. The Disclosure Document must include
details on the rationale, amount, timing, nature, expected risks and benefits of the
expenditure and outline the circumstances where the franchisee is likely to recoup
the amount.
c) Unilateral Variation: Franchisors cannot vary the franchise agreement retrospectively
or unilaterally without the franchisee’s consent.
3. Cooling Off and Termination of Franchise Agreements
a) The cooling off period will be extended from 7 to 14 days after the franchisee enters
into or makes a non-refundable payment under the franchise agreement.
b) A franchisee leasing premises from a franchisor will have a 14 day cooling off period
after receiving the proposed terms of the lease. The franchisee will have a further 14
days period where the terms of the final lease are not substantially identical to the
proposed terms.
c) Franchise transferees, whether entering into a new agreement or not, will have a 14
day cooling off period after the new franchisee takes possession or becomes the
franchisee.
d) Franchisees will be able to propose to terminate the agreement at any time for any
reason. The franchisor must respond within 28 days, with reasons if refusing. The
franchisee may also implement dispute resolution procedures if the franchisor
refuses.
e) The franchisor can no longer terminate immediately for special circumstances, such
as insolvency or fraudulent acts by the franchisee but must provide 7 days notice.
The franchisee may implement dispute resolution procedures, preventing the
franchisor from terminating until the end of the 28 day termination notice.
f) Restraint of trade provisions will no longer be enforceable unless a franchisee was
in serious breach of the franchise agreement or related agreement immediately prior
to expiry.
4. Dispute Resolution
There are additional dispute resolution options available, including voluntary arbitration, conciliation and multi-party alternative dispute resolution. The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) will now oversee all dispute resolution advisor functions. Further, where multiple franchisees have similar disputes with their franchisor, franchisors can now be required to participate in multi-party mediation or conciliation.
5. Penalties
Penalties for breach of the Code are doubled from 300 penalty units to 600 penalty units. A current penalty unit is $222, so 600 penalty units will cost a franchisor $133,200.
6. Key Takeaways
a) Franchisors should review their franchise agreements and make the necessary
amendments before they issue any franchise agreement that will be signed on or
after 1 July 2021.
b) Changes to Disclosure Documents must be made before 1 November 2021.
However, the changes to the disclosure process and the inclusion of the Key Facts
Sheet and Information Statement come into effect from 1 July 2021.
c) Disclosure requirements regarding potential future capital expenditure and rebates
will require significant review and attention.
7. Next Steps
All franchisors should now review their documentation and procedures to comply with these changes to the Code. If you need any help with these changes, please contact us at info@questlegal.com.au or call us on 1300 279 500 or (02) 9135 2903.
