Changes to the Franchising Code of Conduct - July 2021

On 1 June 2021, the Australian Government made amendments to the Franchising Code. An Explanatory Statement is also available on the Federal Register of Legislation.

The amendments follow the Government’s response to the Fairness in Franchising report and also reflect further automotive franchising reforms that the Government announced on 12 March 2021.

We've provided this information to help you understand the new requirements and help you comply.

When the changes apply

Many of these changes will affect agreements entered into, renewed, or extended on or after 1 July 2021. However, some transition periods are different, particularly:

  • most of the new regulations about dispute resolution will apply to any dispute that is notified on or after 2 June 2021, even if the franchise agreement was entered into, extended or renewed before 2 June 2021.
  • most of the regulations that change what’s in the disclosure document will apply to disclosure documents to be given from 1 November 2021.

The updated information statement and the new key facts sheet template, a document which highlights important information in the disclosure document, are both available from the Franchising Code page on our website. These documents are not maintained by the ACCC but are made available on our website for convenience.

Dispute resolution

Alternative dispute resolution

There are now more alternative dispute resolution (ADR) options.

You can resolve a dispute with conciliation as well as mediation, and ADR can be done online. Multiple party dispute resolution and voluntary arbitration are also options for resolving disputes.

Multiple party alternative dispute resolution

If multiple franchisees have similar disputes with a single franchisor, they can seek to resolve their disputes together.  This can take place either by agreement with the franchisor, by request of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), or by referral to an ADR practitioner. When deciding whether to do so, franchisees are allowed to discuss their disputes with each other even if there are any confidentiality obligations in their agreements. This applies to franchise agreements that are entered into, extended or renewed from 1 July 2021.

If any of the franchisees with similar disputes can’t agree with the franchisor on how to resolve their disputes, they can refer their matter to a single ADR practitioner for a single ADR process. The franchisor must attend, and try to resolve the dispute, even if they don’t agree to a single ADR process for the disputes or about the appointment of the ADR practitioner. 

If franchisees are concerned that their discussions may breach competition laws, they can notify the ACCC that they plan to use the class exemption for franchisees to collectively bargain with the franchisor. See our guidelines for collective bargaining class exemptions.

Voluntary arbitration

Franchisees and franchisors can also agree in writing, either in the franchise agreement or separately, to resolve a dispute by arbitration. If you do, the Code sets out a procedure for how to conduct the arbitration.

Other new regulations about dispute resolution

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) is responsible for a number of dispute resolution functions, including appointing dispute resolution service providers if a party requests it.

Confidentiality obligations may apply to information that is disclosed or obtained in an ADR process or arbitration.

Pre-entry disclosure information

Franchisors now need to give more information to prospective franchisees before entering into an agreement. Franchisees should get this information at least 14 days before they either:

  • enter into an agreement
  • make a non-refundable payment.

Some franchisors may have given pre-entry disclosure information to a prospective franchisee before 1 July 2021. If that franchisee hasn’t entered into the franchise agreement or made a non-refundable payment by 1 July 2021, the franchisor must also give them any additional information required under the new rules.

The 14 day disclosure period will start once the franchisor has made the disclosure required under the new rules.

Key facts sheet

From 1 July 2021, a franchisor must give a key facts sheet in the following circumstances:

  • to a prospective franchisee at least 14 days before entering into the franchise agreement or at least 14 days before the franchisee makes a non-refundable payment
  • to a prospective franchisee to whom an existing franchise agreement might be transferred. The franchisor must give them the key facts sheet at least 14 days before giving consent to the transfer
  • to a franchisee who is renewing or extending a franchise agreement. The franchisor must give them the key facts sheet at least 14 days before renewing or extending the franchise agreement
  • to any franchisee who asks for the disclosure document in writing. In addition to the disclosure document, the franchisor must give them a copy of the key facts sheet that is up-to-date.

The key facts sheet is not a substitute for the disclosure document, although it contains important information from it. The key facts sheet and the disclosure document need to be read together. The key facts sheet should be used to help identify some of the critical information in the disclosure document.

The key facts sheet must be in the format of the key facts sheet form linked on our website and include all the required information.

The key facts sheet should reflect the information in the franchisor’s current disclosure document. The franchisor must update the key facts sheet when the disclosure document is updated. This usually happens within four months after the end of every financial year.

When disclosure documents are updated to comply with the new disclosure requirements that apply from 1 November 2021, the related key facts sheet should also be updated.

Information about leases

If the franchisor or its associate is leasing premises, and the prospective franchisee is going to sublease or otherwise occupy those premises, the franchisor must provide a copy of the lease, or a summary of the commercial terms (if they don’t have a copy of the lease).

If there is any other written information that has to be given to a lessee by state or territory law, the franchisee should get a copy of this too. If the lessor didn’t provide that information, then the franchisor should still provide any of this kind of information that they’re aware of.

If a franchise is being transferred

A prospective transferee must now get all pre-entry disclosure documents. The franchisor must give them this information as well as a copy of the existing franchise agreement and any other document that the franchisor would need the prospective franchisee to sign to give effect to the transfer. This only applies to transfers of an existing franchise agreement.

Additional information in disclosure documents

Disclosure documents now need to include the following:

  • the percentage of franchisees that participated in an alternative dispute resolution process or arbitration in the previous financial year
  • more detail around rebates and other financial benefits that franchisors receive from suppliers
  • whether the franchisor or an associate has an interest in a lease that will be used for the operation of the franchised business
  • whether the franchise agreement provides for the arbitration of disputes using the Code’s arbitration provisions
  • the ways in which the franchisee and the franchisor can terminate the agreement early
  • franchisees’ rights to any goodwill they generated
  • any restraint of trade obligations.

Disclosure of capital expenditure

If the franchisor discloses capital expenditure in a disclosure document, they must now include as much information as possible about that expenditure. This applies to disclosure documents that a franchisor must give before they enter into, renew, or extend an agreement.

The franchisor must explain the:

  • reason for the expenditure
  • amount, timing and nature of the expenditure
  • anticipated outcomes and benefits of the expenditure
  • expected risks associated with the expenditure.

The franchisor must also discuss the expenditure with the franchisee before entering into, renewing or extending a franchise agreement. You should discuss the circumstances where a franchisee is likely to recoup these kinds of expenses.

Before these amendments, franchisors could make a franchisee take on significant capital expenditure by saying that it was a necessary investment in the business. They could do this without the franchisee’s agreement. This is no longer acceptable.

More disclosure of leasing information

If a franchisee occupies premises without a lease, but under a right granted by a franchisor or associate of the franchisor, the franchisor or associate must now give them all of the following:

  • a copy of the franchisor’s (or associate’s) lease or agreement to lease
  • details of any incentive or financial benefit that the franchisor or associate is entitled to receive as a result of the lease or agreement to lease
  • details of any incentive or financial benefit that the franchisor or associate is entitled to receive as a result of the franchisee’s right to occupy the premises
  • a copy of the documents that give the franchisee the right to occupy the premises
  • written details of the conditions of occupation

They must do this within a month of either:

  • when the franchisee starts to occupy the premises
  • when both the franchisee and the franchisor have signed the agreement to occupy.

A lessee of a premises may be entitled to written information from the lessor under state or territory law. Franchisees who lease or otherwise occupy premises that are leased by the franchisor or its associate can ask for a copy of this information at any time.

How and when pre-entry documents should be given

The amendments make it clear that prospective franchisees must be given an information statement before being given any other documentation. You can find the updated information statement on the Franchising Code page.

From 1 July 2021 the franchisor must give earnings information with or before the other pre-entry documentation. If the franchisor is giving earnings information, the 14-day disclosure period does not commence until the prospective franchisee has been provided with the earnings information.

From 1 November 2021, if earnings information is provided, it must be in either:

  • the disclosure document
  • a separate document attached to the disclosure document.

Earnings information must, to the best of the franchisor’s knowledge, be accurate. If there is any information that the franchisor knows is not accurate, they must specify which parts are inaccurate.

Extended cooling off period

The cooling off period after entering into a franchise agreement has been increased to 14 days. It was previously 7 days.

Franchisee can terminate after receiving leasing information

Prospective franchisees have certain termination rights when they intend to lease or occupy premises from the franchisor or its associate, but the lease or occupancy right is not yet in force

The franchisee can terminate the franchise agreement within 14 days after receiving the proposed lease or terms of occupancy. If the final lease or terms are significantly different to the proposed terms, the 14 day period restarts. This is so that the franchisee has adequate time to consider the lease or occupancy agreement.

The franchisee can also terminate within 14 days after entering into the lease or being granted the occupancy right. They can do this if, before they entered into the lease or occupancy, the franchisor hadn’t given them terms that were substantially identical to the actual terms of the lease or occupancy right.

The franchisee only has the right to terminate the franchise agreement under this regulation. It doesn’t allow the franchisee to end a lease early or to terminate contracts with other parties that are related to the franchise agreement.

Transferring an existing agreement

From 1 July 2021, there is a cooling off period for existing agreements that are transferred. The cooling off period ends on whichever of these is earlier:

  • 14 days after becoming the franchisee
  • the day on which the new franchisee takes possession and control of the franchised business.

If the new franchisee terminates their agreement during the cooling off period, the previous franchisee will be reinstated as the franchisee if possible. They must refund any payments made by the terminating franchisee under the contract, taking out any reasonable expenses. The franchisor also has similar obligations to refund payments it received from the terminating franchisee.

Terminating an agreement

The disclosure document must now state the circumstances in which the franchisor and the franchisee can terminate the agreement early. Some other changes also apply to termination.

Early termination proposed by franchisees

The Code now sets out how franchisees can propose an early termination of an agreement. From 1 July 2021, if a franchisee proposes early termination, the franchisor must reply in writing within 28 days. If they refuse to terminate, they must give reasons why.

Terminating early on particular grounds

A franchisor can terminate an agreement without notice on particular grounds as set out in the franchising agreement. Previously, these were called special circumstances terminations. For franchise agreements entered into, extended or renewed on or after 1 July 2021 the franchisor must give 7 days’ notice of the proposed termination on particular grounds.

The franchisee can dispute the proposed termination. If that happens, the franchisor cannot terminate the agreement for 28 days after the notice of termination was given. However, the franchisor can require the franchisee to stop operating the business during this period.

If a dispute is notified in these circumstances, parties can ask the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) to quickly appoint a dispute resolution provider.

Marketing funds

The Code now uses the word marketing, instead of advertising. This helps to clarify that the Code applies to more than just advertising.

The Code clarifies that marketing fund obligations apply to the fund administrator. This could be:

  • a franchisor or a master franchisor
  • a third party authorised to administer the fund for the franchisor or master franchisor.

Civil penalties now apply if you breach the rules for making payments to and from the marketing fund.

Passing on legal costs

Franchisors are now required to be more transparent about legal costs passed on to franchisees, and can only seek legal costs arising from the preparation, negotiation and execution of the franchise agreement. If a franchisor seeks for these costs to be paid by a franchisee without adequately specifying their fixed amounts, or seeks to recover legal costs beyond those relating to the preparation, negotiation and execution of the agreement, they are liable to a substantial penalty. 

A franchisor can require the franchisee to pay a fixed amount for particular legal costs so long as it is specified in the franchise agreement, payable before the franchisee starts the business, and the agreement states that the amount:

  • is for the franchisor’s legal costs of preparing, negotiating or executing the agreement
  • does not include any amount for the franchisor’s cost of legal services that will or may be provided, after the agreement is entered into, in relation to preparing, negotiating or executing other documents.

Retrospectively varying a franchise agreement

After a franchise agreement is made, a franchisor can only alter or add terms to the agreement that apply retrospectively if the franchisee gives their consent in writing.

Restraint of trade clauses

The Code places some restrictions on restraint of trade clauses in franchise agreements. One restriction was that a restraint of trade clause would be ineffective if the franchisee was not in breach of the franchise agreement or any related agreement.

Now, a restraint of trade clause will not be effective if the franchisee was not in serious breach of the franchise agreement or a related agreement immediately before the franchise agreement expired. This is to protect franchisees who have only breached the franchise agreement in a minor, technical, or procedural manner.

New vehicle dealership agreements

The existing voluntary best practice principles are reflected in new mandatory obligations in the Code.

Dealers operating as a manufacturer’s agent for new vehicle sales are now expressly protected by the Code.

Co-operatives are not franchises

The Code now explicitly excludes co-operatives registered under a state or territory co-operatives law if the franchisor and franchisee are both members of the same co-operative.

Tags

Topics