
The recent release by the Federal Government of The Competition and Consumer (Industry Code— Franchising) Regulations 2024 (exposure draft) is set to once again bring change to this ever evolving legal space. Initially Introduced in 1998, the Code has been updated multiple times to address emerging issues and improve the franchising sector’s regulatory framework.
It is expected to supersede the current Franchise Code in April this year.
Key changes expected include:
- The imposition of broader civil penalties i.e. fines for Franchisors failing to comply with any substantive obligations placed on them under the Code. Previously the fines were limited to breach of good faith, disclosure requirements, marketing fund management, lease disclosure and mediation participation. This will ensure consistency of enforcement across the Code;
- Removal of the obligation of franchisors to give a separate key facts sheet to prospective franchisees in addition to the already detailed Disclosure Statement they must give. This will help remove red tape without reducing exposure although we think further could be done to simplify the disclosure statement by reducing its size – its 38 pages long !;
- Requirements for franchisors to include in the franchise agreement a buy back or compensation clause for the franchisee for all outstanding stock a franchise may have purchased, where that stock was specified by the franchisor and required to operate that franchise if the Franchisor withdraws from the Australian market, rationalises its networks or changes its distribution networks. This duty to compensate extends to all essential specialty equipment, branded product or merchandise purchased or maintained by the franchisee that could not be repurposed for a similar business. The method of compensation also needs to be spelt out having regard to various factors;
- The franchise agreement must allow for the franchisee to have a reasonable opportunity to recoup any capital investment required by the Franchisor upon entering the franchise agreement. The Exposure Draft explains that this is not to be construed as a guarantee from the franchisor about the viability of the franchised business but rather an obligation to discuss with the franchisee any significant capital expenditure disclosed in the disclosure document and the circumstances in which the franchisor considers that the franchisee or prospective franchisee is likely to recoup the expenditure. Offering only a 5 year Franchise Term when the capital outlay requires 8 years trading before break even may attract penalties;
- Restraint of Trade clauses are already limited in that a Franchisor cannot rely on them in certain circumstances enunciated in Regulation 41. Further now, such clauses are expressly prohibited to be included in the Franchise Agreement from the outset. This is similar to other changes proposed which prohibit certain clauses being included in franchise agreements from the outset i.e. they are now prohibited – and not simply relied upon by Franchisors. This will help protect unsuspecting Franchisees who do not have the benefit of expert legal advice.
- Termination: In situations where the franchisee voluntarily abandons the franchised business, operates the franchised business in a way that endangers public health or safety, or acts fraudulently in connection with the franchised business, a franchisor must not terminate the agreement before a notice period of seven days passes ( If a dispute notice is not being given). If a dispute notice is given, the agreement cannot be terminated until the end of 28 days after the day the dispute notice is given; and
- When a franchisor extends an agreement, a franchisee needs to be advised of its right to request a disclosure document. A franchisor has two months (instead of 14 days) to provide a disclosure document when requested.
So, what does all this mean?
For Franchisors, it means being prepared to update and amend existing templated agreements in readiness for compliance with the new Franchise Code obligations. Failure to do so could lead to very large fines. It also means educating key stakeholders within their organisation about the changes so practice and procedures can be amended to reflect the legislative changes.
For Franchisees, it means education and becoming aware of the changes to afford oneself the benefit of the increased protections on offer.
Overall, the changes represent a balanced revision having regard to Franchisor and Franchisee interests. Franchisors disclosure obligations whilst still stringent have less red tape associated with them. Franchisee protections are enhanced in the knowledge that larger broader fines will exist for Franchisor wrongdoing.