Australia: Hospitality and leisure: Franchising and industry innovation in Asia Pacific

Operator will:

Manage and operate the hotel on behalf of the owner;

• Provide technical services (eg in relation to the design and development of the hotel);
• Licence its brand; and
• Provide centralised adver tising, marketing and reservation services.

Clearly under this structure the hotel benefits from the 'hands on' experience of the operator.

Whilst overall management of the hotel remains with the owner, the owner is required to:

• Adhere to the operator's 'brand standards manual' in terms of both the brand and the standards applicable to that brand;
• Par ticipate in group marketing and adver tising;
• Par ticipate in the group's reservation system;
• Where the hotel is being constructed or renovated, obtain the operator's approval for the relevant plans and specifications;
• Open the hotel on the specified date (some operators may require 'grand opening event(s)';
• Prepare and maintain records and accounts to be shared with the operator; and
• Comply with all legal requirements and provide the operator/franchisor with protection against any claims.

Although management and operation of the hotel is provided by the operator, the owner will remain responsible for:

• Compliance of the hotel with the operator's brand standards (and the cost of renovations associated therewith);
• The cost of maintenance and repairs;
• Insurances;
• The employment of non-management employees;
• Obtaining regulatory licenses for hotel operation, such as liquor licence etc;
• Real estate issues, such as lease renewals,zoning requirements, etc;
• Although not an obligation per se, owners will often seek the right to approve annual budgets, capital and FF&E budgets, approve key personnel positions, review the hotel's accounts, apply performance tests and for a reasonable non-compete restrictive covenant.

The operator will typically provide:

• Training on the operation of the hotel according to the 'system' (some training may be incorporated in the fees, some may involve additional charges);
• Providing and updating the brand standards manual(s);
• Occasionally pre-opening services (which may form part of the fee structure or could be payable separately);
• Access to the operator's marketing, adver tising and reservations system; and
• Technical services may be provided on other areas albeit this is likely to be for additional fees.

The operator will typically:

• Operate the hotel according to the Brand Standards;
• Include the hotel in the operator's marketing, advertising and reservations system;
• Have authority to conduct day-to-day operation of the hotel including purchasing goods and services, conducting litigation, managing staff etc;
• Provide technical services relating to the design and development of the hotel (this is often subject to a separate technical services agreement and fee).

A typical fee structure involves:

• An initial fee (this is often linked to the size of the hotel). In some cases this fee is non-refundable;
• Continuing or royalty fees – this is based on room revenue. Typically this is between 3% and 5% of room revenue;
• Adver tising/marketing contribution – again commonly based on room revenue. This fee generally goes towards a fund for group (not necessarily local or regional) marketing. Typically between 2% to 4% of room revenue;
• Reservation fee(s) (can be combined with above) – supports cost of operator's reservation and/or loyalty system(s). Rates and calculation vary between different operators and the systems they operate.

A typical fee structure involves:

• 'base fee' – typically between 2% to 4% of gross revenue;
• 'Incentive fee' – typically around 10% of gross operating profit;
• Technical services fees – lump sum or payable on a time and materials basis for relevant services;
• Centralised services fees – often made up of:
• • Marketing fees – typically in the region of 2% of room revenues;
  • Reservation fees – calculated per room or against room revenue;
  • Loyalty and other programmes provided.

Australia

(The Franchising Code of Conduct - 1998 as amended; Competition and Consumer Act 2010, The Australian Consumer Law 2010)

There are no specific franchisor filing obligations.

The offer and sale of franchises is generally affected by the principles of common law and, in particular, contract law. It is also regulated by the Competition and Consumer Act and The Australian Consumer Law (which contains provisions regarding misleading or deceptive conduct).

There are specific disclosure obligations.

The requirement for the franchisor to give to prospective franchisees and to franchisees renewing, extending or extending the scope of their agreements a disclosure document at least 14 days before receiving any non-refundable money from the franchisee or before the franchisee enters into a franchise agreement or an agreement to enter into a franchise agreement.

Matters that require disclosing include details of the franchisor and its directors and associates, including their business experience, details of litigation involving the franchisor or its directors, the franchisor's financial information, a summary of the various payments and costs associated with buying, establishing and operating the franchise and a summary of the obligations of the franchisor and franchisee under the relevant franchise agreement.

The disclosure document must be in the prescribed form not only as to the information to be disclosed but also as to the layout of the document. A copy of the franchise agreement (in the form in which it is to be executed) and the Code must also be included with the disclosure document.

Franchisors must update their disclosure document at least annually within four months of the end of each financial year. For most franchisors the financial year concludes on 30 June, and therefore the update must take place by 31 October each year.

China

(Regulations on Administration of Commercial Franchise 2007 as amended; Administrative Measures for Information Disclosure Of Business Franchise; Measures for the Administration of Record-Filing of Commercial Franchises)

There are specific franchisor filing obligations.

The franchise regulations require that the franchisor satisfy several conditions, inclusive of the registration of its core trademarks in the PRC and evidence that the franchisor has owned and operated at least '2 units for 1 year' immediately prior to the application. In the case of hotel franchising the PRC will accept as proof of 'ownership and operation' the fact that the franchisor has exclusively managed at least 2 hotels.

There are specific disclosure obligations.

The Franchise Regulation requires the franchisor to provide the disclosure document to the perspective franchisee at least 30 days before the franchisor and the franchisee sign the franchise agreement.

Matters required to be disclosed include details of the franchisor and its directors and associates, including but not limited to their business experience, details of litigation involving the franchisor, the franchisor's financial information, a summary of the various payments and costs associated with buying, establishing and operating the franchise and a summary of the obligations of the franchisor and franchisee under the relevant franchise agreement.

Hong Kong

The offer and sale of franchises is generally affected by the principles of common law and, in particular, contract law. It is also regulated by the consumer laws that contain provisions regarding misleading or deceptive conduct.

Indonesia

Franchise Law in Indonesia is governed by Law No. 42 of 2007 dated 23 July 2007 on Franchising (Regulation No. 42) and its implementing regulation, Regulation of the Minister of Trade No. 31/M-DAG/PER/8/2008 dated 21 August 2008 on Implementation of Franchising (Regulation No. 31), and the Decree of the Director General of Domestic Trade No. 138/PDN/ KEP/10/2008 dated 31 October 2008 on the Technical Guidelines for the Implementation of Franchising (Decree No. 138).

The Indonesian Supervisory Commission on Business Competition (the Commission) has formulated franchise guidelines (Regulation No. 6 of 2009 on Guidelines for Exemptions from the Implementation of the AntiMonopoly Practices and Unfair

There are specific disclosure obligations.

Prior to entering into a franchise agreement, a franchisor must provide a prospectus disclosing its business data or information to a franchisee at least two weeks before the execution of the franchise agreement, including but not limited to the identity of the franchisor, the business history of the franchisor, the organisational structure and management hierarchy and the balance sheet for the past two years.

Business Competition Law for Agreements Related to Franchises (Guidelines)).

Early in 2013 the Indonesia government implemented additional regulations such as MOT Regulation on Franchise Partnership Development for Food and Beverage Businesses. Such regulations will have a significant impact on franchisor's activities in Indonesia

Japan

The Medium and Small Retail Commerce Promotion Act (Law No. 110 of 1973 – MSRCPA);The Guidelines Concerning the Franchise System (Franchise Guidelines) under the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (Act No. 54 of 1947 – Antimonopoly Act).

The Japan Franchise Association ('JFA') has also implemented voluntary rules, such as the Japan Franchise Association Code of Ethics and theVoluntary Standard Regarding Disclosure and Explanation of Information to Prospective Franchisees.

The Guidelines set out disclosure obligations.

Under the MSRCPA,when a franchisor intends to negotiate a franchise agreement with a prospective franchisee, the franchisor must provide written documents describing the prescribed items and explain the contents of the written documents to prospective franchisees. There are no regulations regarding the frequency of updating disclosures.

Some of the information that must be disclosed includes but is not limited to the name and address of the franchisor, number of full-time employees and, if the franchisor is a company, the title and names of officers; the amount of capital, names of the principal shareholders and, if the franchisor is conducting another business, the type of business, the name of any entity of which the franchisor holds a majority of the voting shares, the balance sheet and profit and loss statement, or other documents equivalent to these with regard to the past three business years of the franchisor's business and if the franchisees need to remit all or part of the sale proceeds periodically, the timing and method thereof.

Korea

The Franchise Act that was enacted on 1 November 2002 and most recently amended on 22 March 2010, and its Presidential Decree, are the primary statutes applicable to the franchisor-franchisee relationship.

There are specific disclosure obligations.

A franchisor must provide a disclosure document to the prospective franchisee even if the franchisee does not specifically request it in writing.

The franchisor must register the disclosure document with the Korea Technology Finance Corporation (KTFC) first and then provide the registered disclosure document to the prospective franchisee.

The acceptance of a franchise fee or execution of a franchise agreement is prohibited unless the franchisor provides the registered disclosure document and 14 days have elapsed from the date of provision of the registered disclosure document.

The following broad categories of information are required to be contained in the disclosure document information: the general status of the franchisor; the current status of the franchisor's franchise; any legal violation by the franchisor and its executive; the obligations of the franchisee; conditions of and restrictions on business activities; detailed procedures and the period required in respect of the commencement of franchise business; and education and training programs (it must be specified if there is no plan for education and training).

Malaysia

Franchise Act - 1998 as amended.

There are specific disclosure obligations.

The franchisor must submit to a franchisee a copy of the franchise agreement, together with the disclosure documents, at least ten days before the franchisee signs the agreement with the franchisor.

The disclosure documents must contain information including: name, business address and type of business, including the franchisor's business experience; details of the intellectual property rights granted to the franchisee; types and amount of fees imposed on franchisees; other financial obligations, including advertising, training or service fess payable; whether the franchisee is required to purchase equipment or products from the franchisor; the franchise term, terms for renewal and termination of agreement by the franchisor or franchisee, and the parties' obligations upon termination; and the franchisor is required to submit audited financial statements for the past three financial years and financial forecasts for five years pursuant to the Franchise.

Thailand

There are no specific laws governing franchises in Thailand; other laws will govern the franchise relationship, including the Civil and Commercial Code (related to the establishment and enforcement of contracts), the Trademark Act (related to the licensing of trademarks), the Trade SecretsAct (related to know-how), and the Revenue Code (related to withholdings on royalty payments).

A draft Franchise Act has been proposed, though not yet enacted.

There are no specific disclosure obligations.

This landscape will likely change if the most recent draft of the Franchise Act is enacted into binding law. The draft includes a requirement that after a franchise agreement is fully executed and delivered, the franchisor must reveal all information that is necessary for operating the franchise business to the franchisee within 60 days. The draft does not specify the type of information considered to be 'necessary' however, so unless future drafts of the bill address this omission, the requirement will exist but will remain fairly vague. Since there is no legislation forcing specific information disclosure, no specific government agencies are responsible for enforcing disclosure requirements.

Vietnam

The basic regulations on franchising are provided in the Commercial Law adopted by the National Assembly in 2005 (Commercial Law). These regulations are elaborated in Decree 35 of the Government (Decree 35), and Circular No. 09/2006/TT-BTM (Circular 09) of the Ministry of Industry and Trade (MOIT).

There is a franchise disclosure obligation.

The franchisor must provide a prospective franchisee or master franchisee with a disclosure document entitled 'Introduction of the Franchise Business' and a copy of the draft franchise agreement at least fifteen working days prior to the execution of a franchise agreement, unless the parties otherwise agree to a longer time. Introduction of the Franchise Business must be prepared according to the standard form provided in Circular 09.

Information to be disclosed is specifically described in the standard form of the Introduction of the Franchise Business attached to Circular 09.