The Franchising Code of Conduct (Code) regulates the relationship and conduct between a Franchisor and Franchisee. One of the most important functions of the Code is to ensure that Franchisees or prospective Franchisees are fully aware of the details and obligations of a Franchise before entering into a Franchise Agreement or prior to renewing a Franchise Agreement.
Among other amendments, a Franchisor’s disclosure obligations under the Code have been amended in an effort to provide more certainty for a Franchisee and the sector as a whole. The amendments to the Code come after a parliamentary joint committee inquiry into the Code including advice from an expert panel.
Some of the important changes to the Code, which apply to Franchise Agreements entered into on or after 1 July 2010 (including those Franchise Agreements transferred, renewed or extended on or after 1 July 2010) include:
- A Franchisor must advise a prospective Franchisee that the Franchise is not a guaranteed success and may in fact fail, which will have consequences for the Franchisee.
- Franchisors are required to disclose the details of all payments a Franchisee may be required to make to third parties, where the payments are within the Franchisor’s knowledge or control or are reasonably foreseeable by the Franchisor. Prior to this amendment, a Franchisor was only required to disclose payments payable to the Franchisor or an associate of the Franchisor.
- Franchisors are now required to disclose whether they will require the Franchisee to undertake any unforeseen significant capital expenditure that the Franchisor did not disclose before the Franchisee entered into the Franchise Agreement.
- The Disclosure Documentation must now include whether the Franchisor will attribute the Franchisor’s costs, such as legal costs, incurred in dispute resolution to the Franchisee.
- Franchisors must disclose the circumstances in which the Franchisor has unilaterally varied a Franchise Agreement in the last three financial years (post 1 July 2010) and the circumstances in which the Franchise Agreement may be unilaterally varied in the future. For example for a Franchise Agreement entered into after 1 July 2013, the Franchisor must advise where the Agreement has been unilaterally varied in the financial years starting 1 July 2010, 2011 and 2012.
- Franchisors must now advise whether they will impose a confidentiality obligation on a Franchisee, and if so, the details of the matters the obligation may cover.
- Franchisors must disclose details of the process that will apply in determining arrangements at the end of the Franchise Agreement, including (but not limited to):
- Whether the Franchisee will have an option to renew or extend the Franchise Agreement, or enter into a new Agreement;
- Whether the Franchisee is entitled to an exit payment at the end of the Agreement;
- Details of arrangements regarding unsold stock, equipment, assets purchased etc; and
- Whether the Franchisee has the right to sell the business at the completion of the Franchise Agreement;
Franchisors must now advise whether they will amend the Franchise Agreement on or before transfer of the Franchise.
In an arguably more Franchisor friendly industry, these amendments are important in providing prospective Franchisees, or current Franchisees looking to renew or enter into new Franchise Agreements, a better understanding of their rights and obligations under the Code and the Franchise Agreement.
Conversely, Franchisors should take this opportunity to revise their Disclosure Document and Franchise Agreement as they will likely require some amendments in order to comply with these amendments.