New Franchising Code obligations start on 1 April 2025
Franchisors should urgently review their franchise documentation ahead of significant regulatory changes starting on 1 April 2025. Obligations introduced by the Competition and Consumer (Industry Codes – Franchising) Regulations 2024 (new Code) mean that franchisors need to update their franchise agreements and processes.
Material changes for franchisors under the new Code
The new Code materially impacts franchisors as follows:
- Franchise agreements must provide an opportunity for return on the franchisee’s investment.
- All franchise agreements must provide for compensation on early termination.
- Certain restraint of trade clauses in franchise agreements are prohibited.
- Franchisors may only charge franchisees limited reasonable and genuine legal costs.
- There are new disclosure requirements for the franchise documentation.
- Franchisees may opt-out of the cooling off period and disclosure document in limited circumstances.
- Franchise agreements can’t be executed until after a 14-day consideration period.
- All common purpose funds are subject to mandatory reporting and payment processes.
- Reduced franchisee recourse to Alternate Dispute Resolution (ADR) processes on termination.
- Additional record keeping.
Franchise agreements must provide opportunity for return on franchisee’s investment
The Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (old Code) requires that new vehicle dealership agreements must provide reasonable opportunity for return on the franchisee’s investment. This requirement will now extend to all franchise agreements. That is, under the new Code a franchisor may only enter into a franchise agreement if it provides the franchisee with a reasonable opportunity to make a return, during the term of the agreement, on any investment required by the franchisor as part of entering into the agreement. On what constitutes a ‘reasonable opportunity’, the Explanatory Statement to the new Code states:
What is considered a ‘reasonable opportunity’ would be specific to the terms of each franchise agreement, the costs paid by the franchisee and the length of the agreement. Franchisors are not expected to provide a contractual guarantee of a profit or the success of the franchisee’s business. It is not intended to remove the inherent risks of running a business but is intended to ensure that the term of a franchise agreement is consistent with the level of investment required.
All franchise agreements must provide for compensation on early termination
The old Code requires that new vehicle dealership agreements provide for compensation for early termination. The new Code extends this requirement to all franchise agreements.
Under the new Code the franchise agreement must provide for the franchisee to be compensated if the agreement is terminated in specified circumstances. These are if the franchisor:
- withdraws from the Australian market;
- rationalises its networks in Australia; or
- changes its distribution models in Australia.
The new Code also requires that the franchise agreement outlines how the compensation is to be determined, with specific reference to:
- lost profit from direct and indirect revenue;
- unamortised capital expenditure requested by the franchisor;
- loss of opportunity in selling established goodwill; and
- costs of winding up the franchised business.
The new Code further stipulates that the franchise agreement must provide for the franchisor to buy back or compensate for certain things purchased by the franchisee, specified by the franchisor and required to operate the franchise in accordance with the franchise agreement or any operations manual. Those things are:
- all outstanding stock; and
- all essential specialty equipment, branded product or merchandise that cannot be repurposed for a similar business.
Certain restraint of trade clauses in franchise agreements are prohibited
Under the old Code, a restraint of trade clause in a franchise agreement doesn’t have effect in certain circumstances after the agreement expires. In contrast, the new Code prohibits restraints of trade in franchise agreements that would apply if the franchisor didn’t extend the agreement and compensate for goodwill in circumstances where the franchisee has sought the renewal of the agreement and isn’t in serious breach.
Franchisors may only charge franchisees limited reasonable and genuine legal costs
The old Code permits franchise agreements that require the franchisee pay the franchisor’s legal costs for preparing the franchise agreement and related documents. However, those costs are restricted to a payment before the start of the franchised business. The payment is a fixed amount specified in the agreement and limited to preparing these documents. The new Code keeps this requirement but restricts the recoverable costs so that they don’t exceed the reasonable and genuine costs relating to preparing, negotiating or executing the franchise agreement.
There are new disclosure requirements for the franchise documentation
The new Code still requires that franchisors give prospective franchisees a disclosure document before entering into the franchise agreement. However, the required content in the disclosure document has changed. The disclosure document will now need to include extra information about whether the franchisee must undertake significant capital expenditure – with justifications for the expenditure. The key facts sheet is also no longer required and has been effectively consolidated in the disclosure document.
Franchisees may opt-out of the cooling off period and disclosure document in limited circumstances
Under the new Code prospective franchisees may opt out of the cooling off period and be given the disclosure document in two limited circumstances. The first of which is if the prospective franchisee has recently had substantially the same franchise agreement with the franchisor. The second is if the business that is the subject of a new franchise agreement is substantially the same as under the old franchise agreement.
Franchise agreements must not be executed until after a 14-day consideration period
Despite the above franchisee opt-outs, franchisors aren’t allowed to rush into signing a franchise agreement. The new Code prohibits franchisors from executing franchise agreements before the end of 14-days after:
- the day the franchisor gives the prospective franchisee the franchise agreement and all other mandatory disclosure documents;
- the day the franchisor gives the prospective franchisee a changed agreement, if after the franchisor makes certain changes to the franchise agreement that are not approved by the new Code;
- the day the earnings information is provided, if the franchisor gives the prospective franchisee earnings information after the franchise agreement is given.
This 14-day period is called the consideration period. Approved changes to franchise agreements that don’t extend the consideration period are changes giving effect to franchisee requests, filling in required particulars, different addresses, minor clarifications, and corrections. The consideration period covers initial entry, renewal and extension of the franchise agreement. A similar consideration period also extends to transfers of franchise agreements. Franchisors must refund any payments a franchisee makes to them during the consideration period if requested in writing.
All common purpose funds are subject to mandatory final reporting and payment processes
Franchise agreements often require franchisees to pay fees to the franchisor for marketing and advertising, and equipment and technology upgrades. These payments are typically pooled together to create marketing funds or cooperative funds. The old Code imposes financial administrative obligations on franchisors for these funds including preparing and auditing financial statements for the fund and giving copies of these statements to franchisees. The old Code also provides for mandatory procedures for payments to and from marketing funds.
There is uncertainty about whether the old Code imposed these obligations and procedures on cooperative funds not related to marketing or advertising. The new Code expands the obligations by extending them to any fund that is a ‘specific purpose fund’. The main funds targeted include those collected for marketing, for use of the franchisor’s technology platform, or funding technology upgrades. However, the key definitional aspect of the ‘specific purpose fund’ is that it is a fund ‘used for a specific common purpose relating to the operation of the franchised business’. There is no separate definition for ‘specific common purpose’. Consequently, and as confirmed by the Explanatory Statement, the financial administrative obligations and mandatory payment procedures will apply to any common purpose fund ‘regardless of what the money is used for, so long as it is for a specific common purpose relating to the operation of the franchised business’.
Reduced franchisee recourse to ADR processes on termination
The new Code keeps the general right for franchisors to terminate for serious breaches on seven days’ notice. However, there are some adjustments to the breaches involved owing to whether a decision has already been made under a process external to the new Code. Where there is such a decision (e.g. insolvency, serious Fair Work contravention, or conviction for serious criminal offence) the franchisee is barred from seeking rapid ADR. Franchisee access to ADR remains though where the franchisee voluntarily abandons the franchise, operates in a way that endangers public health or safety, or acts fraudulently. Franchisees may also still have recourse to litigation on termination.
Additional record keeping
Franchisors must already keep for six years copies of written things given by franchisees and documents that rely on statements or claims in the disclosure document. The new Code keeps these record keeping obligations and extends it to documents franchisors give franchisees as required or permitted by the new Code.
Next steps for franchisors
Renewed franchise agreements must comply with the new Code from and including 1 April 2025. While there is generally some transitional reprieve for existing franchise documentation, it is recommended that franchisors immediately review and update their documents and processes at their earliest opportunity. Failures to comply with the new Code risk penalties of up to $198,000 per breach.
For more information or for assistance reviewing and updating your documents, please contact Coleman Greig’s Commercial Advice experts.
