Uncategorized

THE SIMPLE GUIDE TO FRANCHISE CODE OF CONDUCT CHANGES FROM 1 JUNE 2021

By November 11, 2021 No Comments
marsh-maher-logo-0c15be64-6cdf45d3

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 as follows:

Attach the new Key Fact Sheet to be given to the Franchisee with the disclosure document (not before or after) – ACCC to issue;

Provide the new Information Statement – ACCC to issue; and

If selling an existing franchise, the Franchisor must provide the proposed new Franchisee a copy of the existing franchise agreement and new disclosure documentat least 14 days before the Franchisor consents to the sale.

Franchisees can request documents in hard or soft copy.

Tip 1– Between now and the 1 July 2021- Franchisees are being advised to hold off signing any franchise agreement between now and 1 July 2021 so they can get the benefit of the new Code changes.

What benefits?

Extra early termination rights in favour of the franchisee.

Added 7 days’ notice to terminate for special circumstance.

The franchisors costs for legal services no longer chargeable to franchisee apart from an upfront fixed amount (document fee) for preparing the documents.

Extended Cooling off period from 7 to 14 days for the franchisee.

Restraint of trade clauses less enforceable.

Greater disclosure by Franchisor regarding leases. Licenses and earnings information

Greater disclosure about rebates and capital expenditure.
This will create a delay in signing up new franchisees as Franchisors update their franchise agreements and adopt the new Disclosure document that has yet to be issued by the ACCC.

What to do now?

Start updating your franchise agreement now to be Code compliant from 1 July 2021.

Start issuing the new form of Disclosure document for all matters from the 1 July 2021.

Note: the ACCC has not yet issued the new form of Disclosure document and has allowed a transition period to do so up to the 1 Nov 2021. From the 1 November 2021 you must issue the updated Disclosure document to all new franchisees.

Tip 2 – If in doubt get legal advice now to avoid the risk of civil penalties of $66,000 per breach.

DISCLOSURE DOCUMENT CHANGES FROM 1 JULY 2021

Key issues which we can assist you through:

Lease Information

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 disclosure statement issued by the Landlord.

Tip 3 – If you do not provide full and accurate information about the lease rights in the disclosure document, 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 disclosure document, the 14 days 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.

The Franchisor must disclose if they have any interest in the lease or freehold and also disclose any rent incentives they receive.

REBATES AND FINANCIAL BENEFITS

Greater disclosure setting out the percentage of rebates the Franchisor received (or financial benefit) from each supplier over the last financial year as a percentage of all purchases by
Franchisees in the group (excludes supplies by the Franchisor or associate of a Franchisor).

Tip 4 – There is 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 Franchisee 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.

EARNINGS INFORMATION

The Franchisor must: give any earnings information with and in the disclosure document (not before or after signing the agreement); and include a statement in the disclosure 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 in the disclosure document means the 14 day disclosure period commences only when given and
attached to a disclosure document so you would have to redisclose.

CAPITAL EXPENDITURE

Greater details are required and set out in the disclosure document and a Franchisor can only require a Franchisee to undertake capital expenditure 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 Franchisee of a restraint of trade clause (serious breach is not defined) it is
unclear how this will be enforced however the Courts are indicating that restraints are anticompetitive, and these clauses less effective.

This sounds the death knock to restraint of trade provisions for Franchisors, so you are left with ensuring you protect your IP, know-how and confidential information.

TERMINATION RIGHTS

Special Circumstances – The 7 grounds for a Franchisor to terminate on “special circumstances” now require the Franchisor to give the Franchisee, 7 days prior notice of termination, which allows the Franchisee to raise a dispute.

The Franchisor cannot then terminate the Franchisee and the parties must try and resolve the dispute 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 for franchisees are extended from 7 to 14 days and the 14 days gets reactivated from when the Franchisee receives all lease information earnings information in the disclosure document.

This means the days of rushing out a Disclosure document that is incomplete or lacking in detail to sign up a franchisee are gone there is great risk if you do as the franchisee can then walk out (14 day cooling off) and the ACCC can impose the civil penalty for breach. 

If lease information is given later or differs from the information given in the DD the franchisee has another 14 days disclosure period.

The Franchisee also now has an early termination right– they can at any time during the term write to the Franchisor seeking early termination (with reasons).

The Franchisor must respond in writing in 28 days saying whether they agree or do not agree.

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 are for a Franchisor to say no.

If the franchisor does not agree to early termination the franchisee can seek mediation or arbitration 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 FRANCHISE BUSINESS

Due to the new Code changes and franchisees benefiting from the 14 days cooling off rights an incoming franchisee who has bought a franchise (even after settlement under the sale of business contract has occurred), could cool off leaving the franchisor with no franchisee!

We recommend that Franchisors do NOT agree to transfer or assignment of the existing franchise agreement to the incoming franchisee but issue a new franchise agreement where there is the sale of a franchise.

The Franchisor will still need to give the new franchisee the full suite of Disclosure documents.

In all sales of a Franchisee’s business the Contract for sale should include a clause that states:

This contract is subject to and conditional upon the Franchisor’s approval of the Purchaser;

The Purchaser acknowledges it has received at least 14 days before the Franchisor’s consent the suite of franchise documents from the franchisor (set out all documents); and

Settlement of the sale will only occur on the later of the date set out in the contract or the date (for example 7 days after) 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 in effect provide that a Franchisor can no longer 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;

The Franchisor can charge an upfront fixed amount of dollars (fixed fee) for preparation, negotiation and execution of the agreement and other documents relating to the agreement
but no other legal costs.

Note: this means that the usual costs charged by Franchisor’s lawyers to the Franchisee for a breach notice, deed of variation, renewal, assignment or any other legal services, will be borne by the Franchisor. The penalty for breach is $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 incur which they can no longer recover from a franchisee.

SUMMARY

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 you are Code compliant.

CONTACT:

Robert Toth | Partner | Accredited Commercial Law and Franchise Specialist| robert@mmrb.com.au | www.marshmaher.com.au | 9604 9400 | 0412 67 37 57

Kristen Vassilopoulos | Lawyer | kristen@mmrb.com.au | 9604 9400

Stacey Bonney | Senior Associate | stacey@mmrb.com.au | 9604 9400

Kathryn Finemore | Senior Associate | kathryn@mmrb.com.au | 9604 9400