Updates to the Franchising Code of Conduct (Franchising Code) within the Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Regulation) came into effect from 1 July 2021 impacting on disclosures made to franchisees and new, renewed or extended franchise agreements.
The changes to the Franchising Code are broad, impacting on new franchisees (including transfers of franchises) as well as any renewal or extension to existing franchise agreements. Some of the key areas which are impacted by the changes are dispute resolution, termination and cooling off rights, significant capital expenditure disclosures and disclosure of key documents. The changes also introduce the requirement to provide a “Key Facts Sheet” with the disclosure document.
The changes are aimed at improving the protections for franchisees who are entering into or operating franchises.
Disputes notified to the franchisor on or after 2 June 2021 (regardless of when the franchise agreement was entered into) will need to follow the new dispute resolution process. Previously, the Franchising Code only allowed for mediation as part of the dispute resolution process. From 2 June 2021, parties to a dispute can agree to participate in the arbitration process under the Franchising Code or engage in mediation or conciliation. Similar disputes between franchisees against one franchisor are also permitted under the amendments, with exemptions to confidentiality applying to facilitate the dispute resolution process.
Termination (cooling off)
From 1 July 2021, the cooling off right for new franchisees (including where a franchise is transferred) are amended to provide up to 14 days to ‘cool off’ after entering into the franchise agreement. There are also limited termination rights which may be exercised within 14 days of disclosures being made to the new franchisee where the disclosures do not meet the requirements under the Franchising Code. Significantly, where there is a transfer of a franchise, cooling off rights may apply against the exiting franchisee. The sale agreement between the old and new franchisees would be rescinded, requiring the old franchisee to take back the franchise.
Before the updates to the Franchising Code, immediate termination was permitted on certain grounds (such as fraudulent operation of the business). Where a franchise agreement has been entered into after 1 July 2021, the franchisor will now be required to provide the franchisee with 7 days’ written notice outlining the reasons for termination. If a franchisee disputes the termination in writing, the franchisor is prohibited from terminating for 28 days to allow for dispute resolution between the parties.
Subject to certain exemptions, franchisors will be restricted from requiring capital expenditure throughout the term of the franchise agreement for any franchise agreements entered into, renewed or extended after 1 July 2021. If any significant capital expenditure is required it must now be disclosed to a franchisee when the franchise agreement is entered into, renewed or extended. As a result, any plans for significant capital improvements will need to be planned out well in advance.
After 1 July 2021, franchisors are required to provide the following (in addition to the existing documents) before entering into a franchise agreement or consenting to transfer a franchise.
- Key Facts Sheet – a new document setting out the key information in the disclosure document.
- Sub-lease information – where the franchisor (or its associate) leases the premises, the details of the sub-lease or right of occupancy granted to the franchisee.
Key takeaways for franchisors
Review your disclosure processes and franchisees agreements to ensure they are compliant with the new requirements.
Ensure you are keeping up to date with your compliance obligations.
Cowell Clarke can assist franchisors with their compliance obligations through a range of services, including our Franchise Portal.
Please contact us if you would like assistance or more information.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.