Recent updates to the Franchising Code of Conduct (the Code) have altered some of the disclosure requirements that apply in the event that a franchisee is to enter into a lease with the franchisor or occupy premises leased by the franchisor. This article will outline when franchisors must provide these documents in accordance with the Code's disclosure requirements and the other implications of these statutory changes.

What is Considered a Lease?

As a franchisor, the Code requires you to comply with the new franchising lease disclosure requirements, if you:

  • or your associate, enter into a lease for the premises; and
  • subsequently propose that the franchisee either:
    1. subleases the premises; or
    2. occupies the premises through a license to occupy; or
  • own and directly lease premises to a franchisee from which they conduct or will conduct the franchised business.

It is important to note that franchisors must comply with these requirements, even in the event that they do not enter into a formal sublease or otherwise with the relevant franchisee. For instance, these obligations still apply where a franchisor just grants the franchisee rights to occupy the premises.

Essentially, suppose a franchisor or its associate lease or own the premises, and you allow the franchisee to occupy the premises (regardless of how that is documented). In that case, the franchisor must comply with the new lease disclosure requirements.

What Documents Do You Need to Provide?

In the event that a franchisor satisfies the above criteria, there is a requirement for them to provide extensive lease documents to the franchisee. The franchisor needs to provide these documents in conjunction with all disclosure documents in order to trigger the 14-day disclosure period.

Moreover, the documents that are required vary based on whether the franchisee:

  • enters into a 'lease' with the franchisor or its associate for the premises; or
  • occupy the premises without a lease.

The below table summarises the required documents in each circumstance:

Franchisee 'leases' the premises directly from the franchisor (or an associate of the franchisor)

Franchisee occupies, without a lease, premises leased by the franchisor (or an associate of the franchisor)

Either a copy of the:

  • lease; or
  • agreement to lease

Either a copy of the:

  • lease; or

  • agreement to lease

Details of any incentive or financial benefit that the franchisor or its associate is entitled to receive as a result of the lease or agreement to lease, and who is providing that incentive.

Details of any incentive or financial benefit that the franchisor or its associate is entitled to receive as a result of the lease or agreement to lease and/or as a result of the franchisee's right to occupy the premises.

A copy of the document that gives the franchisee the right to occupy the premises

Written details of the conditions of occupation.

How Do These Changes Affect Franchisors?

In the event that a franchisor must provide the lease documents as outlined above, they will need to ensure that they provide these at the same time as the disclosure documents. This is because the mandatory 14-day disclosure period will not be considered to have commenced until they provide these documents.

Further, suppose a party amends or changes the lease documents after the franchisor originally provides them to the franchisee. In that instance, the 14-day cooling-off period will 'restart' from when the franchisor provides these updated documents to the franchisee. Therefore, you should be aware of this as it could delay the commencement of the franchised business.

If a franchisor does not provide lease documents when required, this will be a failure to comply with the disclosure requirements. As a result, it will amount to a breach of the franchising Code and can potentially attract civil penalties. In addition, a failure to provide the required lease documents may provide the franchisee with a cause of action with which to pursue the franchisor. For example, this can occur if that franchisee has an argument available that they would have done something differently had the disclosure been provided.

Key Takeaways

Given the 2021 changes to the Code, non-compliance with these provisions may result in large penalties. It can also provide franchisees with the right to terminate the franchise agreement. Therefore, it is important that franchisors seek legal advice in the event that they or one of their associates have entered into a lease or owns premises occupied by a franchisee. Doing so will ensure that the franchisor is in compliance with their disclosure requirements. If you need help with understanding your franchising lease disclosure obligations, LegalVision's experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents.