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Changes to the Franchise Code

Changes to the Franchise Code of Conduct and what it means for your franchised business?

James Corne, Managing Director of the Franchise Institute speaks with Peter Sanfilippo, The Franchise Lawyer.

Peter, as you know on 30 October 2014, after many months of review, recommendations and consultation with the franchising sector, a new Franchising Code of Conduct came into being. Can you tell us what this means for franchisors and franchisees?

Thanks James, the new Code came into effect on 1 January 2015. What’s important to note is that most of the new provisions will apply to all franchise agreements no matter when they came into existence. So whether you had your franchise documents drafted in 1999, or 2013 of even 2014 these changes will still apply to you and your franchised business. Many significant changes have been introduced by the new Code and here is a summary of some of the most important:

• Penalties of up to $51,000 for franchisors who breach certain parts of the Code, including those to do with disclosure before entering into a franchise agreement.
• The introduction of an obligation to act in good faith. This applies to both franchisors and franchisees. It applies not only in relation to how franchisors are permitted to exercise their rights under a franchise agreement, but also in relation to the negotiations leading to the signing of the franchise agreement.
• In some circumstances, franchisors can no longer stop franchisees from continuing to operate the same business after the end of the franchise agreement.
• The form of disclosure document has changed considerably, and an Information Statement in a prescribed form must now be provided to potential franchisees at an early stage of the franchise recruitment process.
• Franchisors can no longer require franchisees to undertake significant capital expenditure in some circumstances.

Thanks Peter, that’s quite a list. Can I ask is there a grace period for existing franchisors to update their documents?

Yes. The new Code allows franchisors whose financial year ends on 30 June 2015, until 31 October 2015 to prepare a disclosure document in the new required form. However, there are good reasons why franchisors should consider updating the disclosure document before that date.

What is important to note is that by 1 November 2015 ALL FRANCHISE SYSTEMS will need to be using the new format for their Disclosure Document. Further any new franchise agreements entered into after 1 January 2015, will need to be in line with the new changes to the code. All standard franchise agreement will have to be changed to accommodate the provisions of the new Code, and the legal process to be followed will also be a little different.

Thanks Peter you have been very helpful.

You’re welcome. James Corne, Managing Director of The Franchise Institute.