Changes to the Franchising Code of Conduct

In my post of March, I wrote about the impending changes to the law concerning Franchises and in particular to the Franchise Code. Since then, the Federal Government has released the final draft of the legislation that will bring about these changes. These will help redress the perceived imbalance in the relationship between franchisors and franchisees.

Franchisors need to update their disclosure statements and franchise agreements. There is a new Facts Sheet they also need to prepare.

Main changes for both Franchisors and Franchisees to be aware of:

1. Disclosure of key terms – Franchisor is required to provide to a Key Facts Sheet that summarises in a simple format the details set out in the more detailed and complicated Disclosure Statement. This will assist those franchisees not comfortable with reading the more detailed complex disclosure statement;

2. Disclosure of kickbacks – Franchisor already had a duty to disclose in the Disclosure Statement whether they were receiving financial payments or rebates for requiring a franchisee to use nominated third party supply equipment to operate the franchise. Now the franchisor must also advise of the total amount of the rebate/kick back received from each such supplier from the previous financial year albeit expressed in percentage terms. The franchisor has to also set out if the franchisee is to receive any portion of the rebate and if so, how its calculated. All this should be set out in simple terms in the Fact sheet as well;

3. Disclosure of Restraint of Trade terms. Often Franchise Agreements will impose a restraint on the franchisee such that once the franchise agreement comes to an end, they are not able to trade for a certain period within a certain radius in a competing business. Putting aside how enforceable such a restraint might be – to avoid both simultaneous surprise and disappointment for franchisees who learn later learn of the existence of this clause it will now be necessary for franchisors to disclose it in both the Facts Sheet and Disclosure Statement.

4. Capital Expenditure – most Franchise Agreements give the franchisor the ability to impose upon a franchisee the requirement to buy third party capital equipment during the term of the agreement to enhance the franchise system. It is not a co incidence that the purchase of such equipment often triggers a rebate for the franchisor. To date the Franchise Code of Conduct has provided only some minor threshold for which the franchisor must pass before insisting that franchisees purchase product and equipment. These Amending ( Fairness in Franchising) Regulations have raised the bar making it harder for franchisors to insist on these purchases without compelling reasons or earlier disclosure.

5. Termination. Rights for a franchisee to terminate a fixed term franchise agreement are traditionally limited. Once they sign, it is for the duration of the term unless the Franchisor has engaged in unconscionable conduct, misleading and deceptive conduct, breached an essential term and failed to rectify it and/ or not exercised the good faith required of it under the Franchise Code. These Amending Regulations pave the way for a franchisee to seek termination by setting out the reasons in writing. It need not be for the reasons alluded to above. A franchisor who opposes a request by a franchisee termination must provide reasons in writing. After this, if the franchisee does not agree with these reasons, it can take the matter to mediation. So, whilst there was not a dispute before the request was issued there is one once a refusal to allow termination is given by the franchisor. Plenty of mediation then for the Small Business and Family Enterprise Ombudsman!

When do these changes begin? 1 July 2021

Key Priorities for Franchisors now :

  1. Familiarise themselves with the changes;
  2. Update Franchise Agreement and Disclosure Statement to reflect the changes; and
  3. Prepare the key facts sheet.

DLF can assist you with this.

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