If you are involved, or considering becoming involved in, a franchise business then you may like to read on as numerous changes to the Franchising Code of Conduct (the Code) are proposed to be implemented throughout 2021 in order to address a perceived power imbalance between franchisors and franchisees.
These changes stem from government-led reviews into the franchising sector and the Code’s effectiveness. The first of the changes have already come into effect, including an updated and amended Annexure 2 – Information Statement which franchisors must provide to prospective franchisees. The further key proposed changes are summarised as follow.
Franchisors will (with some limited exceptions where franchise agreement provides a precise dollar figure) no longer be able to make the franchisee pay all or part of the legal costs to prepare, negotiate, or execute the franchise agreement.
The franchisor will not be permitted (subject to the below exceptions) to require a franchisee to undertake undisclosed significant capital expenditure during the franchise agreement term. The exceptions are where the expenditure is:
- agreed to by the franchisee(s);
- approved by a majority of the franchisees; or
- incurred to comply with legislative obligations.
Early Exit by a Franchisee
Under the changes, franchisees can propose to terminate their franchise agreement by notice in writing at any time. There are no limits on what reasons the franchisee may have to terminate and franchisors will then 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 the termination, they must include their refusal reasons. The franchisee can then go through the usual dispute resolution processes provided by the Code.
Retrospective Unilateral Variations
Franchisors will no longer be able to vary a franchise agreement with retrospective effect unless the franchisee agrees. However, this does not apply if the majority of the franchisees affected by the change agree to the variation.
In addition, there are also changes to the franchisee cooling off period (extending it from 7 to 14 days), the alternative dispute resolution process, increased penalties for non-complying franchisors and proposed new disclosure obligations.