New Obligations Force Franchisors to be More Transparent

Franchisor obligations to franchisee

The Australian government release of the Competition and Consumer (Industry Codes-Franchising) Amendments (Fairness in Franchising) Regulation 2021 made amendments to the Franchising Code of Conduct (Code). The main changes include reforms to dispute resolution from 2 June 2021, disclosure document from 1 November 2021 and termination reforms from 1 July 2021. 

The changes are designed to increase the obligations on Franchisors to be more transparent and increase the information provided to Franchisees.

The changes will impact new franchise agreements as well as renewed or any extension of an existing franchise agreement. 

Alternative Dispute Resolution Amendments

Alternative Dispute Resolution (ADR) options have been expanded in the Code to include provision for conciliation and arbitration while maintaining mediation as an option to determine disputes.

The resolution method to be adopted is at the election of the parties. If multiple franchisees have similar disputes under their franchise agreement against a franchisor, they can seek to have their dispute resolved together and have the matter dealt with in the one resolution process.

There is now also a voluntary arbitration option.

Greater Disclosure Obligations for Franchisors

The franchisor under the amendments in addition to the existing disclosure obligations will be required to give prospective franchisees more information before they enter into an agreement or make a non-refundable payment.

Key Fact Sheet

The franchisor is now required to give a prospective franchisee a “key fact sheet” which includes important information from the disclosure document. The key fact sheet is intended to provide a succinct overview of the information contained in the disclosure document.

The key fact sheet does not place on the franchisor additional substantive disclosure requirements.

Franchisor will be required to update this document every year or at the request of the franchisee.

Lease

If the franchisor is leasing the premises and the prospective franchisee will be a sub tenant the franchisor must provide a copy of the lease or a summary of the commercial terms of the lease along with any other information that may be required under a State or Territory Law.

Franchise Agreement

If an existing franchise agreement is being transferred a perspective transferee must be given a copy of the existing franchise agreement and any other document that a franchisor requires a prospective franchisee to sign in relation to the transfer.

The franchisor cannot give consent to the transfer until 14 days after disclosing all the relevant franchise documents to the new franchisee.

Financial Benefits or Rebates

The franchisor is required to provide additional information in the disclosure documents around and financial benefits or rebates that the franchisor receives from suppliers and whether it will be distributed to the franchisees and how much will be shared. 

Capital Expenditure

If the franchisor discloses in a disclosure document any capital expenditure the franchisor must now include as much information as possible about that expenditure. The franchisor must also engage in discussions about the capital expenditure with the franchisees before entering or renewing any franchise agreement.

Franchise Termination Amendments

Extended Cooling off Period

The cooling off period after entering into a franchise agreement has been extended from 7 days to 14 days. The cooling off period commences when the franchisor has provided the franchisee with all the necessary documents including the lease. This extended cooling off period also applies to a franchisee purchasing from a previous franchisee.

Early Release

A franchisee will be able to request an early release form their franchise agreement at any time. The franchisor has 28 days to provide a written response to the proposal requesting early termination. The mandatory good faith obligations will apply in negotiating an outcome.

Notice for Termination

A franchisor must give a franchisee 7 days’ notice if it intends to terminate the franchise agreement on particular grounds as set out in the franchise agreement.

If the franchisee disputes the termination the franchisor cannot terminate the agreement for 28 days after the franchisee gave the notice. The franchisor can require that the franchisee ceases operating the franchise business during this period.

Motor Vehicle Dealership Franchise Agreements Reforms

Following the withdrawal of motor vehicle manufacturers from the Australian market the Australian Government has introduced changes to the Franchising Code of Conduct to legislate the “best practice principles” making them mandatory under the Code. These reforms are designed to instill fairness and transparency in dealership agreements.

A franchisor must not include provisions in a franchise agreement that purport to exclude compensation.   

A franchise agreement should provide a franchisee with a reasonable amount of time to achieve a return on investment required by the franchisor to enter into the agreement.

New Dealership franchise agreements should include provisions for franchisors to compensate or buy back from a franchisee new vehicle inventory, parts and special tools if the franchise agreement is not renewed or is terminated before it expires because the franchisor withdraws from the Australian market, rationalises its network or changes its distribution method that impacts on a franchisee.

Reasonable compensation on one or more of the above occurrences should include lost profits, unrecovered expenditure and unamortised capital expenditure where requested by the franchisor, loss of opportunity in selling established goodwill and winding up costs.

Free Case Evaluation

If you are a Franchisor or Franchisee and have any questions about the above legislative changes, or questions about your obligations in general phone for a free case evaluation 1300 553 343.