Imminent Changes Coming to the Franchising Code of Conduct and Franchisor Disclosure Obligations

Megan Jongebloed, Director, Cowell Clarke

The Fairness in Franchising report (‘Report’), released by the Parliamentary Joint Committee on Corporations and Financial Services in 2019, was forthcoming in its findings and recommendations.

Among other things, it suggested that the current regulatory environment did “not deter systemic poor conduct and exploitative behaviour and has entrenched the power imbalance” between franchisors and franchisees.

The recommended action for the Government was to provide a framework for industry codes to support regulatory compliance, enforcement and appropriate consistency.

In response, the Australian Government’s Franchising Taskforce (‘Taskforce’) released the Competition and Consumer (Industry Codes – Franchising) Amendment (Fairness in Franchising) Regulations (‘Exposure Draft’) in late 2020, which proposed additional disclosure obligations under a revised Franchising Code of Conduct (‘Code’).

The first principle identified by the Taskforce for fair and effective regulation in this area was that “prospective franchisees should be able to make reasonable, informed assessments of the value (including costs, obligations, benefits and risks) of a franchise before entering into a contract with a franchisor.”

Accordingly, the Exposure Draft proposed the following changes to the Code focused on disclosure obligations for franchisors, which if passed by Parliament will come into effect from 1 July 2021.

Pre-franchise agreement disclosure obligations

A Key Fact Sheet must be provided 14 days before a prospective franchisee enters into the franchise agreement. The format and content of the Key Fact Sheet has not yet been finalised.

Lease and sub-lease arrangements: Where a franchisor is the lessee and the franchisee is to be a sub-lessee, the franchisor must provide the franchisee with a copy of the head lease and any disclosure documents/ statements the franchisor has received in accordance with a State or Territory law at least 14 days before the franchisee signs the franchise agreement.

Disclosure document

Information Statement: Currently, the Code stipulates that the Information Statement must be issued to prospective franchisees as soon as practicable after the franchisee formally applies or expresses an interest in becoming a franchisee. In practice, it is typically issued at the same time as the Disclosure Document and Franchise Agreement. The Exposure Draft amends the Code to make it clear that the Information Statement must be provided to the prospective franchisee prior to the Disclosure Document and Franchise Agreement being issued.

Supply arrangements and rebates: Improved disclosure regarding supply arrangements and rebates received by franchisors has been addressed by the Exposure Draft. Franchisors will need to disclose if they or any of their associates will receive a benefit from the supply of goods or services to the franchisee and if so, the following will need to be disclosed: - the nature of the benefit;

- the name of the business providing the benefit;

- the method by which the benefit is worked out;

- whether such benefit will be shared with the franchisee; and if so

- how it will be shared with the franchisee.

Other changes

Capital expenditure: A franchisor’s ability to notify franchisees of necessary capital investment (justified by a written statement) from the expenditure excluded from the ‘significant capital expenditure’ list has been removed. This means that a franchisor can no longer require capital expenditure by written notice during the franchise agreement term. This change will benefit franchisees who have been blindsided by capital expenditure requests from a franchisor. Importantly, this change will not apply to existing franchise agreements and will only be applicable to new, renewed or extended franchise agreements from 1 July 2021.

Marketing Fund: There have been minor amendments to the content in the Code but the substantive change is that franchisors’ non-compliance with the marketing fund provisions will now be supported with penalties (600 penalty units which currently is equal to $133,200).

Legal costs: A franchisor will no longer be permitted to pass on legal costs involved in preparing the franchise agreement unless the costs are specified as a number of dollars, the purpose for the cost is clearly expressed, and the cost only relates to the preparation, negotiation and execution of the franchise agreement.

Penalty increases: The penalties for contraventions of the Code by franchisors will increase from the current 300 penalty units to 600 penalty units.

Cooling off period: A franchisee’s cooling off period will now be 14 days instead of 7 days. The cooling off period for franchisees will now also apply to transfers as well as new franchise agreements and will begin on the later of entry into an agreement or paying money under an agreement.

Termination rights: Franchisees may now propose to terminate a franchise agreement at any time in writing. This change is applicable to all franchisees, irrespective of when the franchise agreement was signed. The franchisor must respond within 28 days and provide reasons if permission to terminate is refused. If the franchisor does not provide adequate reasons for refusal it may be seen to have breached the Code’s good faith obligations. Franchisors’ rights to termination have also been amended. They are still able to terminate a franchise agreement under the Code’s special circumstances termination rights but must now provide the franchisee with 7 days’ notice and the reasons for termination.

Key Takeaways

1. The Code is being changed to address an imbalance that was identified by a Government inquiry and the subsequent Fairness in Franchising report.

2. These changes impose additional disclosure obligations on franchisors, as well as other changes which will prevent franchisees from incurring unexpected legal costs or capital expenditure costs.

3. The changes are almost exclusively for the benefit of franchisees, and harsher penalties will apply to franchisors who do not comply with obligations under the Code.

There are a range of resources available through the Australian Competition and Consumer Commission and the Franchise Council of Australia to assist both franchisors and franchisees.

However, it is always helpful to seek professional legal advice in order to understand your specific obligations to meet compliance obligations and avoid possible penalties or disputes.

Cowell Clarke are commercial law specialists and work with clients across Australia to create value and manage risk.

Megan Jongebloed is Head of the firm’s Franchise Law Group and can be contacted at mjongebloed@cowellclarke.com.au or by calling 08 8228 1107.

“it is always helpful to seek professional legal advice in order to understand your specific obligations in order to meet compliance obligations and avoid possible penalties or disputes.”