Proposed changes aim to protect small business franchisees by setting higher standards and requirements for franchisors throughout franchise relationships and agreement process.
The franchising sector continues to be the focus of regulatory reform, with the Department of Industry, Science, Energy and Resources publishing for consultation Exposure Draft legislation proposing amendments to the Franchising Code. In June this year, the Franchising Code was amended to introduce new requirements in respect of end of term notification obligations, capital expenditure requirements and dispute resolution in automotive dealership agreements and franchise relationships.
These further proposed amendments have been developed by Government to apply to the franchising industry more broadly. In response to the Fairness in Franchising report released in March 2019, the Exposure Draft focuses on perceived weaknesses in the franchising sector that impact small business owners who run franchises. The amending regulations are said to be aimed at introducing new measures to protect franchisees, improve the information available to franchisees and lift franchisor standards of conduct.
These changes will have a significant impact on the sector, if enacted, and franchisors will need to be aware of their obligations in order to avoid facing pecuniary penalties for non-compliance.
New disclosure requirements before entry into franchise agreements
The proposed changes to disclosure requirements would mean that franchisors must provide more information to potential franchisees so that franchisees are better informed prior to making a decision to enter, renew or extend an agreement.
If the amendments are enacted, the franchisor will need to give a prospective franchisee the following documents at least 14 days before they enter into an agreement:
- A copy of the franchise agreement;
- A copy of the disclosure document;
- An updated "Key Facts Sheet" – this document has been revised to better highlight the critical information for prospective franchisees to consider. The Exposure Draft includes a proposed version that will be finalised subject to consultation;
- A copy of the Franchising Code; and
- A copy of the lease and any relevant information (if applicable).
Franchisors will also need to disclose information relating to the arbitration of disputes, early termination methods and rights to goodwill. In addition, the Exposure Draft encourages greater transparency by requiring franchisors to disclose any benefits they may receive from the supply of goods or services to the franchisee eg. commissions, supplier rebates.
Franchise agreement prohibitions
Proposed amendments are also aimed at prohibiting franchisors from partaking in certain activities. First, franchisors would not be permitted to require franchisees to pay all or part of the franchisor's costs of legal services relating to preparing, negotiating or executing the agreement or related documents. However, franchisors would be allowed to require franchisees to make a specific payment before the franchised business begins for the purpose of these legal costs.
The Exposure Draft also extends the capital expenditure prohibitions which were recently implemented in the automotive industry to the whole franchise industry. This means that franchisors would not be permitted to require franchisees to undertake significant capital expenditure in relation to the business during the term of the agreement. However, exceptions are available, such as expenditure disclosed before entering or extending agreements, costs incurred to comply with legislative obligations or any expenditure agreed by the franchisee. If this is the case, the franchisor must provide information such as the rationale, amount, timing, benefits and risks of the expenditure.
Finally, franchisors would also be prohibited from varying franchise agreements retrospectively and unilaterally without the franchisee's consent.
Termination of franchise agreements
The Exposure Draft extends the cooling off period after entering into a franchise agreement from 7 to 14 days. Franchisees will also be able to propose to terminate the agreement at any time, and the franchisor must respond with a written response within 28 days.
However, franchisors are still allowed to give notice of termination on specific grounds in relation to issues such as insolvency, fraud, safety and convictions of serious offences. This requires 7 days' notice, and may be followed up with dispute resolution procedures.
The Exposure Draft proposes to delegate the franchising dispute resolution advisor functions to the Australian Small Business and Family Enterprise Ombudsman. Additionally, it sets out the dispute resolution and complaint handling procedure in great detail, including the introduction of the option for arbitration by agreement.