The Franchising Code of Conduct Has Changed; Here’s What You Need to Know
Keeping up with changes to the franchising industry can feel overwhelming, so we’re here to make things nice and straightforward. It’s important to know where you and your franchisees stand to build and maintain trusted, long-term and profitable relationships. And that all starts with understanding the Code of Conduct.
On June 1st 2021, a significant update to the Franchising Code of Conduct was passed by parliament that has been in effect since July 1st. The changes focus on improving the dynamics between Franchisor and Franchisee by developing three key areas:
Termination of the Franchise Agreement
What do you need to do?
All franchise agreements after July 1st 2021 will need to comply with the new code. For any existing franchise agreements, the new regulations will automatically apply and override any conflicting provisions, so there’s no need to update any existing franchise agreements.
If you need any support in understanding the changes and how they need to be implemented into your franchise, remember that we’re always on hand to help.
Here’s what’s changing…
The primary change made to dispute resolution is the availability of arbitration and conciliation as additional forms of dispute resolution.
Mediation was the only available alternative dispute resolution (ADR) process.
Mediation, conciliation and arbitration are now available ADR processes.
Item 17 of the disclosure document has been amended to reflect this change.
Clause 40B is a new clause and explicitly allows franchisees with similar disputes to discuss the dispute for the purpose of deciding whether to agree to resolve their dispute in the same way.
The code is more flexible on what form of ADR process may be used to try and resolve a dispute.
It’s left up to the parties to decide which ADR process to use.
Franchisors cannot now rely on any confidentiality provision or other argument to prevent franchisees from seeking to resolve a similar dispute collectively.
There is a new document – the “Key Facts Sheet” – that is now part of the documents that must be given to a franchisee before they enter into a franchise agreement. In addition, the changes focus on:
Providing clarity on when documents must be provided;
Additional disclosure obligations when the franchisor or its associate has an interest in a lease (whether as a landlord or the tenant); and
Other additional disclosure obligations about disputes, supplier rebates, what happens at the end of a franchise agreement and earnings information.
Key Facts Sheet
A new document called a “Key Facts Sheet” has been added as a mandatory document that needs to be given to the franchisee before the franchise agreement can be entered into.
Similar to the disclosure document, clause 9A makes clear that the “Key Facts Sheet” will also be a standard form document and must be updated.
The “Key Facts Sheet” is now an additional document that must be maintained and provided to franchisees.
There was only an obligation to provide the “Information Statement”
Clause 11(3) now makes it clear the “Information Statement” should be provided before the franchise agreement, and disclosure documents are provided to a potential franchisee.
If the franchise premises are to be leased from or licenced by the franchisee from the franchisor or its associate, Clause 9(e) now requires a copy of the lease and any associated State or Territory based information statements, be given to the franchisee before the franchise agreement can be entered into.
Franchisors must also provide a copy of this information within seven days of any request by a franchisee (clause 13(2A)).
The process for issuing franchise documents will need to be updated.
The “Information Statement” should be provided to a potential franchisee as soon as possible.
For clarity, this new disclosure obligation only applies if the premises are leased from or licenced by the franchisee from the franchisor or its associate.
With this additional disclosure obligation and associated new termination rights (discussed below), it’s less likely franchisors will choose licence premises.
For franchises where this is unavoidable, it may be worthwhile to finalise leases before the franchise agreement is entered into.
14 Days to Review Documents
Franchise agreements could be transferred from the seller of a franchised business to the buyer without any additional disclosure required by the franchisor.
The buyer was reliant on being provided with the relevant documents from the seller.
Under Clause 9(2A), franchisors cannot give consent to a sale of a franchise unless it gives the buyer 14 days to review all documents required to be signed by the buyer to become a franchisee.
For clarity, this new disclosure obligation only applies if the franchise agreement is being transferred. If a new franchise agreement is being entered into, then the buyer will be considered a “new” franchisee, and the normal disclosure process will apply.
A person that buys a franchised business now always has the benefit of the same disclosure requirements as a “new” franchise.
Also now makes it clear that a grant of a new franchise, even in a sale, will require the franchisee to be given the 14-day disclosure period. Franchisors should ensure the internal franchise sale process takes this into account.
See also cooling-off rights in the termination section below.
Printed Or Electronic Documents
Clause 9(2C) gives potential franchisees the right to require the franchisor to give them mandatory franchise documents in printed or electronic form or both.
As part of the process of issuing franchise documents, franchisors should give franchisees the option to choose how to receive the franchise documents.
Disclosure Of Percentage Engaged In Proceedings
The requirement to disclose information about disputes was limited to those that were in litigation.
Inclusion of new item 4.4 in the disclosure document.
Franchisors must now disclose the percentage of franchisees engaged in any mediation, arbitration or conciliation proceedings.
It gives franchisees a clearer picture of the level of franchisee satisfaction across the network compared to the old disclosure requirements as not all disputes go to court.
Disclosure Of Details
The Franchisor was only required to disclose basic details of any rebate or financial benefit received from a supplier.
Update to item 10.1 of the disclosure document.
Franchisors must now provide greater detail including:
the nature of any rebate or financial benefit;
the amount of rebate or financial benefit received as a percentage; and
if the rebate or financial benefit is shared with franchisees what percentage is shared and a description of each shared rebate or financial benefit.
Gives franchisees a clearer picture of any potential conflicts of interest between the franchisee, the franchisor and a supplier.
Franchisors will need to ensure there are precise methods in place for calculating any supplier rebates and the sharing of any supplier rebates.
Disclosure Of Interest
Item 13.3 of the disclosure document now requires disclosure of any interest by the franchisor or its associate in any lease.
Similar to the update to item 10.1, the new item 13.3 gives franchisees a clearer picture of any potential conflicts of interest between the franchisee and the franchisor in relation to a premises.
Details On End Of Franchise Agreement
Updates to Item 18 of the disclosure document requires franchisors to provide more substantive details of what happens at the end of a franchise agreement.
Addition of specific new items about goodwill and restraint of trades.
Item 18 should now provide more information on what happens at the end of a franchise agreement.
Although arguably not the intention of the old code, it was possible to provide earnings information separately from the disclosure document.
Earnings information can now only be given if:
It’s given at the same times as the disclosure document; or
Any earnings information given is then afterwards included in the disclosure document.
Note that when earnings information is provided, clause 9(4) now resets the 14-day disclosure requirement.
Earnings information should always be included with the disclosure document.
The primary changes are:
the increase in the cooling-off period from 7 days to 14 days;
giving franchisees an explicit right to start negotiations for terminating a franchise agreement; and
immediate termination now requires seven days’ notice.
Cooling Off Period
Cooling off period of 7 days.
The new code now has a cooling-off period of 14 days.
The cooling-off period now also resets when the franchisee gets a copy of the lease and the premises is leased from or licenced by the franchisee from the franchisor or its associate (clause 26(1)).
Note any termination via these new cooling-off provisions only applies to the franchise agreement – it does not terminate the lease.
It has also been extended to include sales of the business when the existing franchise agreement is transferred (clause 26A).
Clause 26B now gives franchisees the right to propose termination at any time.
The franchisor must then respond to the proposal within 28 days.
The cooling-off period has been extended to apply to the new disclosure obligations for licenced premises and transfers of franchise agreements.
The requirement that a franchised business sale be terminated if a franchise agreement is transferred means franchisors are more likely to grant a new franchise agreement.
Right To Termination at Any Time
Franchise agreement could be immediately terminated in some special circumstances.
Termination cannot now be immediate. The franchisor must give a 7-day notice period to the franchisee.
The franchisee can then contest the proposed immediate termination and refer the matter to ADR.
The franchisor may, however, also require the franchisee to stop operating the franchised business during the seven day period and (if applicable) 28 days from when the matter was referred to ADR.
Gives franchisees a way to contest any immediate proposed termination.
It’s not clear from this amendment what happens if ADR takes longer than 28 days; however, the obligation of good faith likely means ADR must be concluded before the franchise agreement may be terminated.
Franchisors will need to ensure there is a right in the franchise agreement to require franchisees to stop operating.
Significant Capital Expenditure
Significant capital expenditure was allowed if the franchisor considered it necessary, and it was justified by a written statement.
This exception has been removed.
In addition, there are additional disclosure obligations (including an express obligation to discuss) if there are any potential significant capital expenditures set out in the disclosure document.
Franchisors will need to review disclosure documents to ensure any potential significant capital expenditure is set out. In particular item 14 of the disclosure document will need to be reviewed.
Marketing Funds And Other Cooperative Funds
Clarified advertising is considered part of marketing.
Extends the obligation to comply with the code to any party that controls a marketing or cooperative fund and not just the franchisor.
Inclusion of civil penalty for misuse of funds.
Provides clarity on reporting obligations for marketing and cooperative funds.
Franchisors should review how funds from marketing funds are used and ensure they are properly set out in the disclosure document.
Makes it clear that compliance with the code on the collecting and using of funds from a marketing fund is an important part of the code.
Franchisors’ Legal Costs
Costs associated with issuing breach notices and renewal notices could be passed on to the franchisee.
Only the cost associated with preparing the franchise agreement and other associated documents can be passed on to the franchisee. Note these costs must also be disclosed and set out as a fixed amount.
Franchisors will need to ensure legal costs for preparing the franchise agreement and other associated documents are clearly set out.
Retrospective Changes To Franchise Agreements
Makes it clear any changes to a franchise agreement cannot apply retrospectively.
Restraint Of Trade
Clause 23 sets out conditions when a restraint of trade would not apply. One of the conditions required to be satisfied was for the franchisee to not be in breach of the franchise agreement.
The new code now requires the breach to be serious and recent.
Removes potential for franchisors to breach a franchisee for a trivial reason in order to enforce the restraint of trade.
If you want any more information on working smarter, contact the experts at The Franchise Institute. You can call us on 1300 855 435 or fill in this contact form, and one of our experts will contact you as soon as possible.
Thanks for reading, The Franchise Institute Team 1300 855 435