Introduction
From 1 April 2025 a number of changes to the Franchising Code of Conduct (the Code) will take effect.
These amendments follow on from the independent review of the Code which took place last year, and subsequent response by the Federal Government to the findings and recommendations.
Some of the key changes include the removal of the key facts sheet, broader restrictions in relation to restraint of trade clauses, and mandatory requirements for return on investment and compensation for early termination.
Franchisors should ensure they understand how the changes will impact on their businesses and use this time now to review their franchise agreements and disclosure documents.
So what are the key changes to the Code and how they will practically impact franchisors and their businesses?
A Code with a new purpose
Currently the Code states that its purpose is simply to “regulate the conduct of participants in franchising”. This description (which does little more than state the obvious) will soon be replaced with a much broader and more detailed statement purpose which defines 3 critical aspects of the Code’s operation:
Firstly, to address the imbalance of power between franchisors and franchisees;
Secondly for the Code to try and improve the industry standards of conduct and practice, particularly by achieving better disclosure of information by franchisors; and
Lastly, that the Code is intended to provide a procedure for resolving disputes which is considered to be both fair and equitable.
This new purpose provides a good insight into what objectives the government is aiming to achieve in implementing this new version of the Code.
Future review
The new version of the Code will include a term that a mandatory review must be commenced before 1 April 2030 in order to assess its role, impact and operation. The findings from that review will then be put into a report and presented to Parliament.
Merger of Key Facts Sheet and Disclosure Documents
The requirement for franchisors to provide a key facts sheet (KFS) will soon be removed from the Code so that from 1 April 2025, franchisors will no longer have to create, maintain or provide a KFS. Franchisors must continue to provide franchisees with a KFS up until this date.
Any requirements from the KFS which are not presently required by the Disclosure Document (DD) will be added into the required fields for that document. Franchisors should therefore take care to ensure that their DD includes all the mandatory information in Schedule 1 of the new Code by the time the changes take effect.
Marketing and Cooperative Funds – a new name
The Code will soon refer to both marketing and cooperative funds as ‘specific purpose funds’. The terms in the Code will therefore apply across the board to any funds specified in the franchise agreement allocated for a specific, common purpose, such as marketing, shared resources, technology platforms and upgrades.
Franchisors must continue to provide franchisees with financial statements for specific purpose funds which include sufficient detail of the fund’s receipts and expenses to give meaningful information about income sources and items of expenditure, particularly with respect to the specified common purpose.
Opt-out provisions for existing franchisees
The new Code will provide that where an:
Existing franchise agreement is to be renewed, extended or transferred, then those franchisees will be able to opt-out of receiving the disclosure documents; and
Existing franchisee is to enter into a franchise agreement, including by way of transfer, they may opt-out of the 14-day cooling off period which allows them to terminate in that time.
The reasoning behind these opt-outs is that the risks which arise from inadequate disclosure are significantly lowered in cases of existing franchisees.
There are a few important points franchisors should note about these opt-outs. Firstly, existing franchisees can only opt-out where they have been a party to another franchise agreement with the franchisor, which is the same or substantially the same, and, the franchisee’s business is the same or substantially the same as the one which is the subject of the new agreement. So, one example scenario where this could apply, is where a franchisee has a physical location for the business, such as a bricks and mortar store, and that location changes but the business remains the same.
The second thing to note is that these opt-outs will only apply where the franchisee makes a written request to the franchisor and even where a franchisee does opt out, they will still retain the right to request a disclosure document later on. Lastly, the 14-day disclosure period (now called the consideration period) will still apply to renewing or extending franchisees who choose to opt-out after receiving the franchise agreement.
Franchisors should ensure they maintain records of all opt-outs.
Franchisor must not sign during Consideration Period
Under the new Code the franchisor will be prohibited from executing the franchise agreement with the prospective franchisee before the 14-day consideration period has passed (contrast this with the current Code which requires that a franchisor must not ‘enter’ into a franchise agreement during the 14-day disclosure period). This change is intended to avoid ambiguity arising about the timing of when the agreement was “entered into”.
Franchisor’s Legal Costs
The new Code will soon add an additional condition that a franchisor’s fixed legal costs must not exceed the reasonable and genuine costs related to the preparation, negotiation, or execution of the franchise agreement.
Franchisors will need to take care therefore to ensure that the amount charged for their legal costs in the franchise agreement genuinely reflects their reasonable legal fees, or otherwise risk facing a civil penalty.
Termination for serious breach
The new Code will expand the list of grounds for serious breach which entitle a franchisor to terminate a franchise agreement on 7 days’ notice. So, this will mean that a franchisor may terminate the agreement on 7 days’ notice in circumstances where:
1. the franchisee:
a) no longer holds a licence that required to carry on the franchised business;
b) Becomes bankrupt or insolvent under administration;
c) is a company that is deregistered by ASIC;
d) is convicted of a serious offence; and
e) is found to committed a serious contravention or an offence of Fair Work Act or Migration Act;
2. and the franchise agreement gives the franchisor power to terminate the agreement on any of these listed grounds
The thinking is that in these circumstances, it would not be necessary to enable franchisee to go through the dispute resolution process because they have already had the chance to challenge the relevant conduct in the relevant authority/court.
Note however that franchisees will still have the right to raise a dispute and access expedited ADR processes if the franchisor issues a breach notice for other alleged breaches.
Reasonable opportunity for return on investment (ROI) by franchisee
A significant change in the new Code is the requirement that franchisees must have a reasonable opportunity to recoup any capital investment required by the franchisor upon entering into or under the agreement. Franchisors must not enter into an agreement unless it provides for this, otherwise they will risk incurring a civil penalty.
While the current Code does contain such a requirement, it is limited only to motor vehicle dealerships. The new Code will soon expand its application to all franchisees.
This change does not mean however that franchisors will be expected to provide a contractual guarantee of a profit or the success of the franchisee’s business. The Government has explained that the requirement is not intended to remove the inherent risks of running a business, but rather is intended to ensure that the term of a franchise agreement is consistent with the level of capital investment which must be input by the franchisee.
At this stage it is not clear how a ROI is to be measured. Franchisors will need to turn their mind to the tenure of the franchise agreement and likely costs incurred by the franchisee to determine whether the franchisee will have a reasonable opportunity to make a ROI. This may then result in franchisors granting franchise agreements which run for longer terms.
Additionally, if any expenses are disclosed in the franchising agreement, the franchisor must discuss with the franchisee the circumstances in which the expenditure is likely to be recouped.
Compensation for early termination
The new Code will also require that franchisors must not enter into a franchise agreement unless it provides for the franchisee to be compensated for early termination due to the closure of the franchise network, or withdrawal from Australia, or because of rationalisation of the network or changes to its distribution model. Presently, this obligation applies only to motor vehicle dealerships but like the previous obligation, it will soon be expanded to all franchisees.
Additionally, the new Code requires that the franchise agreement must also:
expressly state how the compensation is to be determined with specific reference to lost profit from direct and indirect revenue, unamortised capital expenditure required by the franchisor, loss of opportunity in selling established goodwill and the costs of winding up the business; and
contain provisions for the franchisee to return, and the franchisor to accept and buy back or compensate the franchisee for outstanding stock prescribed by the franchisor and necessary to operate the franchised business, all essential specialty equipment, branded products or merchandise that was required by the franchisor and cannot be repurposed for a similar business.
This is a significant change under the Code for franchisors because it shifts onto them the considerable risk and costs if the franchise agreement is terminated or not renewed. Franchisors who do not comply will face a possible civil penalty.
ASBFEO – New powers to name franchisors
Under the new changes, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) will have a broader power to publicise the names of franchisors who have refused to engage or withdraw from an ADR process for a franchise dispute.
The ASBFEO will have the discretion as to whether and how it makes public the names of any such franchisors. Publicity of this kind could result in significant brand and reputational damage to franchisors and could in turn deter prospective franchisees from joining the network.
Broader restrictions on Restraints of Trade
Presently under the Code a restraint of trade will have no effect after expiry of the agreement in circumstances where:
the franchisee had given written notice seeking to extend the agreement on substantially the same terms applicable under the agreement or offered to other prospective franchisees;
the franchisor refused to the extension (and also that the franchisee was not in serious breach or contravened any confidentiality or intellectual property provisions); and
the franchisee had claimed compensation for goodwill and no genuine amount was given by the franchisor, or the franchise agreement did not allow the franchisee to claim any such compensation.
The new Code will reframe this by prohibiting a franchisor from entering into a franchise agreement (or another document incorporated into the agreement) which contains a restraint of trade that would apply in these same circumstances, and now also where the franchisee had sought to renew the agreement.
In other words, whilst the current Code operates to make such a restraint of trade legally ineffective, the new Code means the franchisor will be in contravention (and liable to pay a penalty) if they enter into a franchise agreement which includes the restraint, or if they seek to enforce it.
Disclosure of former franchisee’s personal information
Presently, under the Code former franchisees can request that the franchisor do not disclose their personal information to prospective franchisee and the franchisor must abide by any such request.
Franchisors should be aware that under the new Code they cannot disclose this personal information to prospective franchisees unless they have first notified the former franchisee in writing at least 14 days beforehand that they have the right to request non-disclosure, and no such request was made by the former franchisee.
Former franchisees can also request to have their personal information removed from the franchisor’s disclosure document at any time.
Franchisors can be penalised if they include any personal information of former franchisees without giving at least 14 days’ written notice, or if they engage in any conduct designed to influence whether a request is made or not.
To avoid risks of non-compliance, franchisors should ensure they give written at the time it is known that a franchise agreement will end and keep records of all notices. If the former franchisee does not request non-disclosure, then they can rely on the initial notice (i.e., there is no need to give notice again for every instance of disclosure).
Extra information in disclosure document
Under the Fair Work Act franchisors and their officers can be held legally responsible for franchisees’ conduct if they knew, or could reasonably be expected to have known, that a particular or similar contravention would or be likely to happen, and they did not take reasonable steps to prevent the contravention.
The new Code will require that franchisors must include in their disclosure document details of any litigation commenced by a public agency for breaches of the Fair Work Act against the franchisor under these extended liability provisions.
Expansion of protections - motor vehicle dealerships
The new Code will expand the definition of ‘motor vehicle dealership’ to also include service and repair work carried out by dealerships which sell, lease and exchange motor vehicles.
The updated definition means that those terms which specifically apply to motor vehicle dealerships will now also be relevant for franchised businesses which sell, lease and exchange motor vehicles), and also undertake service and repair work.
Note that for franchised businesses that do only motor vehicle service and repair, the Code will continue to apply generally. However, those businesses still won’t be considered motor vehicle dealerships under the expanded definition.
Next steps for franchisors
Franchisors should act now to review their agreements and disclosure documents and ensure that they meet the requirements of the new Code that will take effect on 1 April 2025.
Cowell Clarke can assist franchisors with all aspects of their compliance obligations under the Code and a range of other services. Please contact us if you would like assistance or more information.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.