The changes to the Franchising Code of Conduct as detailed in the Competition and Consumer (Industry Codes – Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Code Amendments) came into force 1 July. Pursuant to the Code Amendments franchisors are required to update the form of the disclosure document as set out in Annexure 1 of Schedule 1 of the Code Amendments by 1 November.
However, there are certain obligations under the Code Amendments that apply to agreements entered into renewed or transferred from 1 July and franchisors will need to make some updates to the disclosure document before 1 November for those new, transferred or renewed agreements. The following should be updated in the disclosure document before 1 November:
Cooling Off Period - the change to the cooling off period pursuant to the Code Amendments took effect 1 July 2021 and franchisors will need to amend the cooling off period in the disclosure document to 14 days.
Capital expenditure - franchisors must update the disclosure document with all capital expenditure costs anticipated during the term of a franchise agreement. Franchisors must include as much information as practicable about the expenditure including:
rationale for expenditure;
amount, timing and nature of the expenditure;
anticipated outcomes and benefits of the expenditure;
the expected risks associated with the expenditure.
In addition to the disclosure document requirements, before entering into, renewing or extending the term or scope of a franchise agreement, a franchisor must discuss the capital expenditure with the franchisee and those discussions must include a discussion of the circumstances under which the franchisee is likely to recoup the expenditure having regard to the geographical area of the franchised business.
If a franchisor does not update the information regarding significant capital expenditure costs with the franchisee, it will only be able to require a franchisee to incur capital expenditure costs if:
the franchisee agrees; or
it is a requirement to comply with legislative obligations; or
it is to be incurred by all or the majority of the franchisees and the expenditure is approved by the majority of those franchisees.
Disclosure changes to be made by 1 November
Franchisors will then need to make the amendments to the form of the disclosure document as set out in Annexure 1 of Schedule 1 of the Code Amendments by 1 November during the course of the usual update to the disclosure document.
These changes are summarised below.
Rebates – franchisors must provide more information regarding any rebates or other benefits the franchisor receives from the supply of goods or services to the franchisee. This includes the nature of the benefit, the name of the business providing the benefit and the method of calculation. Franchisors must also disclose whether the benefit is shared directly or indirectly with the franchisee and if so the method of calculating how much is shared.
Arbitration of disputes – franchisors must set out whether the franchise agreement provides for the arbitration of disputes as set out in Subdivision C of Division 3 of Part 4 of the Code Amendments.
Termination – franchisors must include new items in the disclosure document setting out the following termination rights under the franchise agreement:
the rights a franchisor has to terminate the franchise agreement before expiry;
the rights a franchisee has to terminate the franchise agreement before expiry; and
the right of a franchisee to give the franchisor a written proposal for termination at any time under the new clause 26B of the Code.
Goodwill – franchisors must include a new item in the disclosure document setting out a franchisee’s right (if any) to goodwill generated by the franchisee upon termination of the agreement.
Earnings Information – franchisors must insert new mandatory text in the disclosure document regarding earnings information if earnings information is given by the franchisor in the disclosure document or an attachment.
Mandatory Information Statement – franchisors must replace the mandatory information statement included in the disclosure document with the new statement as set out in the Code Amendments.
Franchisors will need to amend the disclosure document as set out in the Code Amendments in addition to the usual annual process. If a franchisor anticipates it will enter into any new agreements or an agreement is renewed or transferred, it will need to make interim changes to the disclosure document before 1 November 2021.
Cowell Clarke can assist franchisors with their compliance obligations through a range of services. 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.