Overview of Legal Changes to Franchising Laws

Franchising Law Changes Applying from 1 July 2021

The Australian Government recently made amendments to the Franchising Code of Conduct (Code), which came into effect on 1 July 2021.

We give a brief synopsis of the amendments made to the Code, which are relevant to both franchisors and franchisees.

Alternative Dispute Resolution (ADR)

Prior to the recent changes to the Franchising Code, disputes were resolved by mediation.

The changes to the Franchising Code now introduce conciliation as a dispute resolution method. This is in addition to mediation.

Conciliation or mediation is collectively referred to as the ADR (Alternative Dispute Resolution) Process. The appointed conciliator or mediator is referred to as the ADR practitioner. Multiple franchisees which have the same or similar dispute with the franchisor can elect to resolve their franchise dispute together using one ADR practitioner, and the franchisor cannot object to this.

The parties can also agree, either under the franchise agreement or by separate agreement, to have any dispute resolved by arbitration.

The ADR practitioner and arbitrator (as the case requires) is appointed by the Australian Small Business and Family Enterprise Ombudsman.

Key Facts Sheet

A franchisor must now give a “key facts sheet” to a prospective franchisee. The key facts sheet is essentially a summary of the key information contained within the Disclosure Document. The form of the key facts sheet is contained on the ACCC website.

The key facts sheet must be provided to prospective franchisees at least 14 days before they enter into a Franchise Agreement i.e. at the same time that the franchisor provides the prospective franchisee with a copy of the execution version of the Franchise Agreement, Disclosure Document and Information Statement.

Disclosure of Capital Expenditure

A franchisor who discloses capital expenditure in a Disclosure Document, which is most if not all franchisors, must now include additional information regarding this expenditure in the Disclosure Document. They must provide as much information as possible about this expenditure in its Disclosure Document and must explain the:

• reason for the expenditure;
• amount, timing and nature of the expenditure;
• anticipated outcomes and benefits of the expenditure; and
• expected risks associated with the expenditure.

Interestingly, the franchisor must discuss the capital expenditure with the franchisee before entering into, renewing or extending a Franchise Agreement. That discussion must include a discussion of the circumstances under which the franchisee considers that the franchisee is likely recoup that expenditure.

Until this recent change to the law, franchisors were not required to discuss the requirement for foreseeable significant capital expenditure with franchisees. Many franchisors only notified franchisees of the required significant capital expenditure just before it was required. Many franchisees which did not budget for such expenditure were caught “off guard”, resulting in additional financial strain for many such franchisees.

By requiring a franchisor to discuss foreseeable capital expenditure with franchisees at the time of entry or renewal of a franchise agreement, it allows a franchisee to:

• have input into the extent and nature of the capital expenditure which may be required, although the ultimate decision in relation to this rests with franchisors; and
• be aware of and budget for the foreseeable capital expenditure.

Greater Disclosure of Leasing Information

Further disclosure requirements are required where the franchisor holds the lease for the premises and gives the franchisee the right to occupy the premises under that lease. The franchisor must now provide all of the following to a franchisee:

• a copy of the franchisor’s lease or agreement to lease;
• details of any incentive or financial benefit the franchisor is entitled to receive under the lease or agreement to lease;
• details of any incentive or financial benefit the franchisor is entitled to receive as a result of the franchisee’s right to occupy the premises;
• a copy of the documents which give the franchisee the right to occupy the premises e.g. licence agreement; and
• written details of the conditions of occupation

Franchisee can Terminate Franchise Agreement after Receiving Lease Information

Where the franchisee has not yet been given occupancy rights e.g. the premises is under construction, and is subsequently given the proposed lease or terms of occupancy, the franchisee can terminate the franchise agreement. The franchisees must do this in writing within 14 days of receipt of the lease or terms of occupancy.

It is important for franchisees to get legal advice on their lease or occupancy agreement and ensure that they understand and are satisfied with the lease terms.

Extended Cooling Off Period

The cooling off period has been increased from 7 days to 14 days. Cooling-off-periods allow the franchisee the right to terminate the Franchise Agreement after signing the Agreement. It is there to protect potential franchisees from high pressure sales tactics.

This also allows franchisees additional time to obtain advice. Franchisees would be wise to use this time to do additional due diligence on the business and get legal advice on their franchise documents if they haven’t already.

Restraint of Trade of Franchisee

A restraint of trade clause in a franchise agreement will no longer be effective if the franchisee was not in serious breach of the franchise agreement or any related agreement (e.g. lease) at the time the franchise agreement expired. Previously, the franchisee only needed to be in breach of the franchise agreement when it expired.

This change protects franchisees who have only breached the franchise agreement in a minor, technical or procedural manner.

PCL Lawyers are experienced franchise lawyers. PCL Lawyers acts for a number of Franchisors and franchisees.

We provide advice to those wishing to start or enter into a franchise agreement in a wide range of industries. We also have extensive experience in resolving franchise disputes through the ADR and court processes.

How we can assist Franchisors

A Franchisor is required to update its Disclosure Document on or before 31 October in each financial year.

PCL Lawyers can update a franchisor’s disclosure document so that it:

• is up to date for the financial year ending 30 June 2021; and
• complies with the recent changes made to the form of disclosure document required to be provided to franchisees under the Code.

Franchising is becoming more complex for franchisors and we can assist franchisors with complying with the latest changes in legislation.

How we can assist Franchisees

PCL Lawyers can review and advise franchisees on the various franchise documents provided by a franchisor, including:

• franchise agreement;
• disclosure document;
• key facts sheet;
• lease or occupancy licence;
• any other ancillary documents provided by the franchisor.

Additionally, PCL lawyers can provide business and structuring advice to franchisees looking to enter into a franchise to ensure that the franchise is acquired in the correct legal entity from an asset protection and tax perspective.

To discuss your franchise matter further speak to of our franchise lawyers on 1300 907 335 or complete an online enquiry form.

If you are considering purchasing a franchise or business feel free to download our guide to buying a business here.

About The Author - Chris Karatselios

Chris is an Accredited Commercial Law Specialist and a Partner at PCL Lawyers. Chris has approximately 30 years’ experience in commercial and property law. Chris has extensive expertise in complex...