For some franchise systems the introduction of the Personal Property Security Act 2009 (Cth) (PPSA) may be significant, with specific action required to protect the franchisor’s interests or ensure franchisee compliance. For others it may ultimately prove less critical, or even irrelevant. However we recommend that all franchise systems carefully consider the possible application of the PPSA, and take a conservative and long term approach to the law.
One of the challenges when a new regulatory regime is introduced is anticipating all of the possible scenarios that could arise. This is because our laws are developed and refined not just through legislation, but by regulation, judicial determination and administrative interpretation. It can be years before there is certainty around the meaning of new laws, but in the meantime businesses need to make decisions and protect their assets.
For this reason we have developed a range of PPSA solutions. This article explores what we have called our patch solution, which is essentially intended to protect franchise systems that have considered their position, determined that the PPSA is unlikely to have much application to their business, but nonetheless want to protect themselves from the consequences of unforeseen situations and unfavourable judicial interpretation or legislative amendment.
Essentially we recommend franchisors review their franchise documentation and processes and take steps to ensure that:
- the franchisor is permitted to register a “Security Interest” if the franchisor determines that the franchise agreement or a transaction in connection with or contemplated by it constitutes or contains or may in the future constitute or contain a Security Interest under the PPSA;
- the franchisee is required to acknowledge the entitlement of the franchisor to register any Security Interest the franchisor has, and the value given by the franchisor for the Security Interest;
- the franchisor has the right to require the franchisee to take action, provide information, produce documents and sign or obtain any documents or consents or do other necessary things to ensure each Security Interest is registered, enforceable and is effective to give the franchisor the desired protection, priority or enforcement rights;
- the franchisor has the right to insist on strict compliance with the requirements of any notice issued under the PPSA at the cost and expense of the franchisee, and the franchisor is indemnified for any cost the franchisor incurs in registering, maintaining, discharging and/or enforcing a Security Interest or doing any other thing the franchisee is required to do in connection with a Security Interest held by the franchisor;
- the franchisor has the right to obtain prompt notification of any change to information that the franchisee provides to the franchisor in relation to a Security Interest, including any change that would require a Financing Change Statement to be lodged; and
- any non-mandatory obligations imposed on the franchisor under the PPSA are waived.
We will be producing a range of further materials as we complete our reviews of client documentation, including a comprehensive article on how the PPSA is likely to affect franchise systems. Clauses such as guarantee clauses, options to purchase, equipment rental provisions and charging provisions are among the areas that have been identified.