Most of you will now be aware that the new Franchising Code of Conduct (the Code) came into effect on 1 January 2015. The new penalty provisions in the Code mean that the risks associated with falling foul of the Code are greater than ever before for franchisors.
Whilst some obligations under the new Code came into effect at the start of the year, other transitional provisions mean that you have some time up your sleeves before needing to update your franchise documentation.
THINGS YOU SHOULD BE DOING BY NOW
Not sure if you are currently complying? Here is a quick recap of some of the key practical steps that your network should have implemented as at 1 January 2015.
- Providing Information Statements to prospective franchisees
The Code requires franchisors to provide prospective franchisees with an Information Statement as soon as practicable after the prospective franchisee franchise formally applies or expresses an interest in a franchise. We recommend doing this in the early stages of the recruitment process to be on the safe side – for example, when you receive an email from a prospective franchisee indicating they might be interested in purchasing a franchise.
The Information Statement is contained in Annexure 2 to the Code and must be printed in size 11 font on no more than two pages. Here is an information statement we prepared earlier.
- Using a separate marketing fund bank account
If your network operates a marketing fund, contributions to the fund should be paid into a separate bank account dedicated to that fund. Franchisors should be contributing to the fund at the same rate as franchisees, for each corporate store or outlet they operate.
- Updating your end of term notifications
Your ‘end of term’ notices advising franchisees that you wish to ‘extend’ the term of a franchise agreement should now contain a statement that the franchisee is entitled to a copy of your disclosure document on extension.
- Providing franchisees with lease details
If you or your associate lease premises to a franchisee, you need to provide the franchisee with a copy of any lease or agreement to lease, in respect of the premises together with details of any incentives or financial benefits that you are entitled to as a result of the lease or agreement to lease.
- Providing prospective franchisees with your most recent financial statements
You have an ongoing obligation to provide prospective franchisees with a copy of your most recent financial or audit statements (if that document is not already attached to your disclosure document), as soon as reasonably practical, and before the prospective franchisee enters into a franchise agreement.
- Keeping records of everything
The Code now imposes a positive obligation on you to keep each document (or a copy) that you receive from a franchisee or prospective franchisee, and any document that supports a statement made in your disclosure document. The record keeping obligation extends to things like the provision of Information Statements to prospective franchisees, site and territory history forms, performance management documents and end of term notices.
THINGS YOU SHOULD THINK ABOUT SOON
Some changes to the Code do not require you to take immediate action, but we do recommend you start thinking about your franchise documentation and how they may need to be reviewed and updated in the near future.
Reviewing your franchise agreements for key issues
The Code has introduced some new provisions which may impact on your ability to enforce key terms in your franchise agreements, or which you may want to address more generally. For example:
- enforcing end of term restraints has become more difficult as the Code now provides that, where compliant franchisees are denied an extension of term and are not provided with genuine compensation at the end of the term, restraints will be unenforceable
- clarifying the new good faith obligation and the purpose of the franchise agreement
- reflecting the modified transfer of franchise agreement provisions.
You may need to review and amend your franchise agreement or implement some new strategies to address these issues.
Updating your disclosure documents using the new Code format
The Code sets out a reformatted and renumbered form of disclosure document which contains new disclosure requirements that were not contained in the previous Code.If your disclosure document was compliant as at 31 December 2014, then the new Code allows you until October 2015 to update your disclosure documents in accordance with the new Code. If not, then you need to update your disclosure document as soon as possible using the new Code format.
Some of the new disclosure requirements include:
- information regarding master franchise arrangements and online selling activities
- end of term arrangements, including details on a franchisee’s option to renew a franchise agreement
- disclosure in relation to any future capital expenditure requirements and more details on how marketing fund contributions are spent.
Your network may stand to benefit from disclosing in relation to the above issues, so our recommendation is for franchisors to update their disclosure documents sooner rather than later.
Consequences of non-compliance
Franchisors face serious penalties for breaches of the penalty provisions under the new Code. The ACCC now has the power to:
- seek penalties of up to $51,000 for breaches, via the court system
- issue infringement notices of up to $8,500 for body corporates (and $1,700 for individuals) per breach, without needing to go via the courts.
To put the penalty regime into context, if a franchisor produces a non-compliant disclosure document, the ACCC has the power to issue the franchisor with an infringement notice for each occasion that the disclosure document was issued to franchisees and prospective franchisees.