THE SIMPLE GUIDE TO FRANCHISE CODE OF CONDUCT CHANGES FROM 1 JUNE 2021
This is a “cut through the crap” guide for those in the sector:
FROM THE 2 JUNE 2021
- Any disputes will be dealt with under the new ADR rules and via the ASBFEO Ombudsman office.
- Disputes can now also involve arbitration either if agreed to by the parties or directed by the ASBFEO.
- Arbitration can be more costly than Court action so mediation will still be the most attractive and effective dispute resolution option.
FROM THE 1 JULY 2021 (MAIN CHANGES)
Reminder- most of the changes below only apply to agreements entered into, renewed or extended on or after 1 July 2021.
Franchisors must update their franchise agreements from 1 July 2021:
- Attach the new Key Fact Sheet to be given to franchisee with the disclosure document (not before or after) – ACCC to issue.
- Provide the new Information Statement – ACCC to issue.
- Franchisees can request documents in hard or soft copy.
- If selling an existing franchise, the franchisor must provide the proposed new franchisee a copy of the existing franchise agreement and new disclosure at least 14 days before the franchisor consents to the sale.
Tip 1– we suggest issuing the new form of disclosure document for all matters from the 1 July 2021, even though the Govt has allowed a transition period to do so from the 1 Nov 2021 and ensure you attach the new Franchise Code to the DD.
Tip 2 – if in doubt disclose it! to avoid risk of civil penalties $66,000 per penalty per breach.
DISCLOSURE DOCUMENT CHANGES FROM 1 JULY 2021
Key issues which we can assist you through:
Provide full details of the lease and occupancy rights and a copy of any lease documents for example – offer to lease- agreement to lease- lease- sublease- occupancy license and lease disclosure statement issued by the landlord.
Tip 3 – if you do not provide full and accurate information about the lease rights in the DD the 14-day disclosure period does not start until you give that information.
If the final lease details are different to the information in your DD, the 14 cooling off period only starts when you give that information – so you risk a franchisee being able to walk away.
This means the days of signing up a franchisee without a site or while in negotiations for a site are fraught with risk.
Franchisor must disclose if they have any interest in the lease or freehold and also disclose any rent incentives offered.
REBATES AND FINANCIAL BENEFITS
Greater disclosure including the % of rebates the franchisor received (of financial benefit) from each supplier over the last financial year as a % of all purchases by franchisees in the group (excludes supplies by the franchisor or associate of a franchisor).
Tip 4 – no need to disclose this information if the agreement allows the franchisee to buy from non-approved suppliers or the rebate is paid to a cooperative fund controlled by the franchisor.
Tip 5– Rebates do not include payment by a franchise to the franchisor, master franchisor or associate for a wholesale supply.
A lease incentive is not a rebate, but you need to disclose the lease incentives -see below.
Franchisor must give any earnings information with and in the DD (not before or after signing the agreement). Include a statement that the information is correct to the best of their knowledge or state that the information may not be accurate. A breach may attract a civil penalty of $66,000. Failure to provide the information means the 14 day disclosure would recommence only when given and attached to a DD.
Greater details required and must be in DD and a franchisor can only require a franchisee to undertake capital expenditure if required if required by law, a majority of franchisees agree where it affects the majority, or the express consent of the franchisee is given.
TERM AND RESTRAINT OF TRADE
Franchisors need to disclose if the franchisee has any rights to goodwill end of term and if the agreement has a restraint or non-compete clause.
Tip 6- As the Code has been amended to provide that a franchisor can only rely on a “serious breach” by the franchise for a breach of a restraint of trade clause (which is not defined) it is likely the breach would have to be before the agreement term ends.
This sounds the death knock to restraint of trade provisions for Franchisors, so you are left with protecting your IP know how and confidential information.
Special circumstances – The 7 grounds for a Franchisor to terminate on “special circumstances” now require the Franchisor to give a franchisee 7 day prior notice of termination, which allows the franchisee to raise a dispute.
The franchisor cannot then terminate the franchisee, the parties must try and resolve the matter in that period or refer the matter to the ASBFEO for mediation or arbitration.
In the meantime, the Franchisor can require the franchisee not to operate the business in the 28 day period.
Tip 7- All franchise agreements will need to be amended to comply with these new provisions. These provisions do not apply to pre 1 July 2021 agreements until they are renewed or extended.
TERMINATION AND COOLING OFF RIGHTS EXTENDED TO FRANCHISEES.
- Cooling off rights extended from 7 to 14 days and the 14 days gets reactivated from when the franchisee receives the lease and correct and final lease documentation.
- 14 day disclosure commences only if all documents and information are included in the DD that is the earnings information, lease details.
- If lease information is given later or differs the franchisee has another 14 days disclosure period.
- Franchisee right at any time during the term to write to the franchisor seeking early termination (with reasons).
- Franchisor must respond in writing in 28 days saying they agree or do not.
- If the answer is no (most likely) the franchisor must set out reasons in its response within 28 days.
Note: there is no guidance as to what acceptable reasons for a franchisor to refuse early termination.
The parties can then seek ADR via the ASBFEO.
It is one response per one proposal from the Franchisee, so the franchisor does not have to enter into ongoing correspondence with the franchisee if they have given one reasonably detailed response.
TRANSFER OF A FRANCHISE AGREEMENT ON SALE OF A FRANCHISES BUSINESS
Due to the new Code changes and that the new franchisees now benefit from the 14 days cool off rights to terminate the franchise (even after settlement under the sale of business contract has occurred) we recommend all sales of a franchisees business should be on the basis of a new fresh franchise agreement is offered to the purchaser/incoming franchisee.
You still need to provide them with proper and full disclosure.
Contracts for sale of a franchise business should have a clause that states:
- This contract is subject to and conditional upon the Franchisors approval of the purchaser;
- The purchaser acknowledges it has received at least 14 days before the franchisors consent the following suits of franchise documents from the franchisor (set out all documents);
- Settlement of the sale will only occur on the later of the date set out in this contract or the date that the 14 days cooling off period in favour of the purchaser has ended.
LEGAL COSTS FROM A FRANCHISEE
Although very wordy and difficult to read the Code amendments (clauses) the upshot is this:
- It is illegal to charge franchisees for any undetermined and future legal service costs other than an upfront fixed fee (see below) provided that is set out in the agreement.;
- That an upfront “fixed amount of dollars: (fixed fee) for preparation, negotiating and executing the agreement and other documents relating to the agreement can be charged.
Note: this means that the usual costs charged by franchisors lawyers to the franchisee for a breach notice deed of variation or renewal assignment or any other legal services will be borne by the franchisor. Penalty for breach $66,000.
Tip 8 – Franchisors may need to increase their upfront franchise fee and all other fees for example Assignment and Renewal fees to cover the extra cost they will now carry.
This is a summary of the key changes that affect those in the sector.
With over 35 years of franchise expertise and our talented group of lawyers at MMRB we can assist you to ensure your Code compliance.