Changes to the Australian Franchising Code of Conduct

If you’re in franchising, you’re probably pretty familiar with the Australian Franchising Code of Conduct. From July 2021, a number of changes to the code will be rolled out to address “a perceived power imbalance between franchisors and franchisees.” Below are the changes that franchisors and franchisees need to be aware of and prepared for before July:

Alternative Dispute Resolution process

The mediation process will be removed and replaced with the Alternative Dispute Resolution (ADR) process. ADR options include: arbitration, conciliation and mediation. 

Capital expenditure

The franchisor cannot require a franchisee to undertake significant capital expenditure during the franchising term. Franchisors are exempt from this where capital expenditure is:

• Disclosed in the disclosure document before entering, renewing or extending the term of the franchise agreement;
• Approved by the majority of franchisees;
• Incurred to comply with legislative obligations; or
• Agreed to by the franchisee(s).

Contract variation

A franchisor cannot vary the franchise agreement with retrospective effect unless the franchisee agrees. If the majority of franchisees to be affected by the change agree to the variation, then this does not apply. 

Cooling-off transfer 

Changes to the cooling-off period include:

• Extending it from 7 days to 14 days;
• Starting it on the later of (no longer the earlier of):
• Entry into an agreement (including ancillary documents); or
• Paying money under an agreement.
• Applying the cooling-off period to transfers as well as new agreements; and
• If the franchisee provides leasing documentation.

Disclosure obligations

Changes to disclosure obligations include:

• The introduction of a Key Facts Sheet, to be provided with the disclosure document;
• Disclosure of additional information concerning capital expenditure, marketing funds, rebates and earning information;
• The ability of a franchisor to provide the disclosure document in an electronic or printed form;
• Franchisors who sublease or sub-licence a lease to franchisees must provide the lease and relevant lease disclosure statements when providing the disclosure document. Franchisors are to provide these statements a minimum of 14 days before executing the franchise agreement; and
• Franchise transfers will require the disclosure document, even where a new franchise agreement is not required.

Early exits

Franchisees are able to terminate their franchise agreement via a written notification to the franchisor at any time. There are no limits on reasons for termination.

A franchisor will have 28 days to provide a substantive written response to the proposal, to which mandatory good faith obligations will apply. If the franchisor does not agree to termination, they must give refusal reasons. The franchisee can then go through the usual dispute processes as outlined in the Code. However, franchisors that refuse termination could be seen as in breach of the Code’s good faith obligations, or to have engaged in unconscionable conduct.

Legal costs and penalties

Franchisors cannot make the franchisee pay all or part of the legal costs to prepare, negotiate or execute any contracts under the franchise agreement. With exception to instances where the agreement includes a specific dollar amount and is specifically outlined within the franchise agreement.

Penalties imposed on non-compliant franchisors will increase from 300 penalty units to 600 penalty units.

Note: 1 penalty unit = $222, so 600 penalty units = $133,200

Marketing funds

Terminology in the marketing fund sections will change, but obligations concerning marketing funds remain the same. The Code replaces the term ‘franchisors’ with ‘fund administrator’, capturing franchisors, individuals and master franchisors who operate a fund.

The fund administrator will no longer need to maintain a separate account with a ‘bank’, but can maintain a separate account with a ‘financial institution’ instead.

In summary

There are many changes due to occur in July 2021 and it’s time to prepare. The impact that these changes will have on franchisors is significant and therefore franchisors should start updating their agreements and disclosure documents in line with the changes.