From July 2021, the Australian Government will begin rolling out numerous changes to the Franchising Code of Conduct (the Code) to address a perceived power imbalance between franchisors and franchisees. These changes stem from a Fairness in Franchising Report and an Exposure Draft of proposed changes to the Code, following a Parliamentary Inquiry into the franchising sector and the Code's effectiveness.
This article outlines the anticipated future Code changes. It also explains a minor change to Annexure 2 – Information Statement, which franchisors use to provide prospective franchisees with information. This change took effect on 12 January 2021.
What is the Information Statement Change?
This change includes:
- updating Annexure 2 – Information Statement to reference the ACCC's free online education courses available to franchisees; and
- a small administrative change to the legislative history.
What does it mean for me?
Franchisors should now use the new Annexure 2 – Information Statement when issuing franchise documentation to prospective franchisees.
As always, a franchisor should ensure:
- the Information Statement is provided to franchisees at the earliest opportunity, usually after submitting an expression of interest form; and
- that you refer to (and including in your Disclosure Document) the most current version of the Code.
What Are the Proposed Changes?
Some new disclosure obligations have been proposed, including:
- the introduction of a Key Facts Sheet, to be provided with the disclosure document. The Key Facts Sheet will summarise the information found in the disclosure document. Its structure is not yet final;
- disclosure of additional information concerning capital expenditure, marketing funds, rebates and earnings information.;
- a franchisor can provide the disclosure document in an electronic or printed form;
- franchisors who sublease or sub-licence a lease to franchisees must provide the lease and relevant lease disclosure statements when providing the disclosure document. Franchisors must provide these at least 14 days before executing the franchise agreement; and
- franchise transfers will require the disclosure document, even where a new franchise agreement is not required.
The franchisor cannot require a franchisee to undertake significant capital expenditure during the franchise agreement term. The franchisor has some exemptions where expenditure is:
- disclosed in the disclosure document before entering, renewing or extending the term of the franchise agreement;
- approved by a majority of the franchisees;
- incurred to comply with legislative obligations; or
- agreed to by the franchisee(s).
Terminology in the marketing fund sections will change. The obligations concerning marketing funds (and cooperative funds) will remain the same. However, the Code will replace the term 'franchisors' with the term 'fund administrators', capturing franchisors, individuals and master franchisors who operate a fund.
Similarly, the fund administrator will no longer need to maintain a separate account with a 'bank' but can maintain a separate account with a 'financial institution' instead.
Early Exit by a Franchisee
Under the changes, franchisees can propose to terminate their franchise agreement via a written notification at any time, to the franchisor. There are no limits on what reasons the franchisee may have to terminate.
Franchisors will have 28 days to provide a substantive written response to the proposal, to which mandatory good faith obligations will apply.
If the franchisor does not agree to the termination, they must include their refusal reasons. The franchisee can go through the usual dispute resolution processes provided by the Code.
However, franchisors that refuse a termination request could be seen to have breached the Code's good faith obligations or to have engaged in unconscionable conduct.
The draft code suggests that franchisors can still terminate an agreement under the Code's 'special circumstances' termination rights. However, franchisors will be required to provide the franchisee with seven days notice and their reasons.
If the franchisee disputes the termination, the parties can refer the matter to an alternative dispute resolution process, including arbitration (if mutually agreed).
Cooling-Off and Transfer
Some changes to the franchisee cooling off period include:
- extending it from seven days to 14 days;
- starting it on the later of (no longer the earlier of):
- entry into an agreement (including ancillary documents); or
- paying money under an agreement;
- applying the cooling-off to transfers as well as new agreements; and
- if the franchisee provides leasing documentation.
Under the changes, franchisors cannot make the franchisee pay all or part of the legal costs to prepare, negotiate, or execute the franchise agreement.
There are some exemptions to this if the franchise agreement provides a precise dollar figure.
Unilateral Variation (Retrospective)
Franchisors cannot vary the franchise agreement with retrospective effect unless the franchisee agrees. However, this does not apply if the majority of the franchisees to be affected by the change agree to the variation.
Alternative Dispute Resolution (ADR) Process
The mediation definition will be removed and replaced with other ADR options such as arbitration, conciliation and mediation.
The Code changes will double the penalties imposed on non-compliant franchisors from 300 penalty units to 600 penalty units.
A current penalty unit is $222, so 600 penalty units will cost a franchisor $133,200.
When Will the Proposed Changes Commence?
Most of the proposed changes will commence 1 July 2021. However, the draft legislation is currently in a review phase, so some changes may take longer. It is unclear whether some changes will apply to existing franchise agreements or only new agreements entered into after 1 July 2021.
The Franchise Code of Conduct is undergoing change, with some changes already commenced and others due to commence later this year. Franchisors should start updating their franchise agreements and disclosure documents to ensure they are operating their network per the most recent version of the Code.