Why is a shareholders’ agreement valuable? How can it protect you and the future of your company? ...
If you’re a prospective tenant or landlord entering into a leasing transaction then it’s likely that you will be asked to sign a number of different documents. It’s important to understand the differences between each document and how they interact in order to determine which is appropriate for your situation. ...
The NSW Parliament recently passed the Retail Leases Amendment (Review) Bill 2016 (“the Bill”) which has achieved royal assent and is expected to commence shortly. The Bill introduces reforms to the Retail Leases Act 1994 (“the Act”) that governs NSW retail shop leases.
Some of the ways which landlords and tenants will be impacted include:
- Minimum term
The requirement for a minimum lease term of 5 years will be removed.
Leases with a term of more than 3 years will need to be registered. The lease will need to be lodged within 3 months after it is signed.
- Disclosure of outgoings
Landlords will have stricter disclosure obligations for outgoings contributions. A tenant will not have to pay an outgoing if it is not disclosed in the landlord’s disclosure statement.
- Non-retail premises
If a premises is used wholly for non-retail purposes then it will be excluded from the Act. This includes ATMs, vending machines, public telephones, children’s rides, internet booths, private post boxes and certain storage uses.
If a tenant exercises its right to terminate the lease during the first 6 months due to the landlord’s failure to give a disclosure statement or due to a defective disclosure statement, the tenant can recover compensation from the landlord. This includes the reasonable costs of entering into the lease and fitout costs.
- Mortgagee consent fees
Tenants will not be liable to pay the costs of the landlord obtaining mortgagee consent to the lease.
- Return of bank guarantees
Landlords will be required to ...
Well, it’s that time of year again! If you’re a franchisor, it’s time to update your disclosure documents. You’ll need to have finished this within 4 months of the end of your financial year. This includes preparation of financial reports for the financial year. For franchisors whose financial year ends on 30 June, you have until 31 October to finalise your reports and disclosure documents.
Updating your documents is an important part of running a franchise system and is mandatory under the Franchising Code of Conduct (the Code).
What does the annual update entail?
When carrying out their annual update, franchisors should consider the following details:
1. Financial details
These must be prepared either in accordance with sections 295 to 297 of the Corporations Act 2001 or by an independent auditor. Your disclosure document must include financial reports for the last 2 financial years. The franchisor must also sign a statement confirming their solvency and ability to pay its debts.
2. A list of current franchisees.
Have there been any new franchisees, sales of existing businesses, terminations of franchise agreements, or franchisees whose operations have ceased?
3. Financial information and payments required under Franchise Agreements.
Have there been any fee increases? For example, in some franchise systems fees increase annually in line with CPI increases.
4. Changes to the intellectual property
Has the franchisor rebranded, introduced a new logo or registered any new trade marks?
5. Major capital expenditure required by franchisee.
Does the Disclosure Document sufficiently cover everything, for example the expenses involved in a store upgrade? An ...
How Will Pending Changes To The Retail Shop Leases Act Affect Your Business?
In November 2016 some important changes to the Retail Shop Leases Act 1994 (Qld) (the Act) will take effect, impacting on both tenants and landlords.
When is a retail lease legally entered into?
According to commercial law in Australia, a retail lease is legally considered ‘entered into’ on the earlier of two important dates: the date the lease becomes binding on the parties, or when the tenant takes possession of the premises.
The changes to the Act now provide that a lease is entered into the earlier of:
1. when the lease is signed by all parties
2. when the tenant takes possession of the premises or
3. when the tenant first pays rent (other than a deposit to secure the premises).
Leases covered by the Act
In order to be covered by the Act, a lease must be for a retail shop situated in a retail shopping centre or used predominantly for carrying on a retail business. There are further detailed conditions which apply to meeting these criteria.
The changes to the Act now exclude the following from the definition of a retail shop lease:
1. premises with an area over 1,000 square meters
2. premises used for a non-retail business, which are located within:
a. a multilevel retail shopping centre where the proportion of retail businesses on that level is less than 25%
b. a single level building and the retail area of the building is less than 25% of the total lettable area of the building
3. ATMs and
4. vending machines.
Other key changes to note in the revised Retail Shop Leases Act
At the end of each period for which a tenant pays outgoings, a landlord must provide an audited statement that details the outgoings. These statements must now provide a breakdown of centre management costs. Outgoings will also now exclude excess paid by landlords on insurance claims.
If a tenant is required to contribute towards a promotion fund, then the ...
For Franchisors: What Are My HR Responsibilities To Franchisee Employees In Australia?
The employee underpayment scandal and subsequent investigation by the Fair Work Ombudsman into retail convenience chain 7-Eleven has prompted the franchise industry to scrutinise the responsibilities franchisors owe to franchisee employees in Australia.
Are franchisors responsible for the actions of franchisees?
Under the Franchising Code of Conduct and under the typical franchise agreement, franchisors are not responsible for the actions of franchisees towards their employees. Franchisors and franchisees are legally and financially independent parties.
In essence, a franchise agreement is an agreement that allows a franchisee to carry on their own independent business in accordance with the franchisor’s model. Franchisees are obliged to run their own business, while at the same time abide by the principles of uniformity of the system regarding the products or services offered in their businesses.
Franchise agreements will commonly provide that franchisees are responsible for complying with industrial relations laws by paying employees the correct award, tax and superannuation.
The 7-Eleven payment scandal case study
In response to the employee underpayment allegations, the franchisor of 7-Eleven established an independent investigation panel, introduced changes to its business model and made commitments to provide compensation to underpaid franchisee employees. The franchisor’s response to the situation might be distinguished from how many other franchise systems might react because the 7-Eleven business model provides a profit share arrangement between the franchisor and its franchisees.
In most franchise systems there is no profit share, but the franchisor receives a regular franchise fee from franchisees, which may be a set royalty or an amount based on the franchisee’s performance. In the usual case, the franchisor is removed from the day-to-day running of the ...
Cut Price Pizza – A Win For Franchisors
In a decision that will set an important precedent in the franchising industry, a class action by a group of disgruntled Pizza Hut franchisees against their Australian franchisor has failed.
The case highlights the importance for franchisees of fully understanding their rights and limitations before entering into a Franchise Agreement. It also points to the necessity for franchisors to be mindful of their good faith obligations towards franchisees.
In July 2014, Yum! Restaurants Australia Pty Ltd, the franchisor for Pizza Hut, cut the prices of pizzas in the ‘Classics range’ offered by franchisees from $9.95 to $4.95. This move was known in commercial terms as the ‘Value Strategy’.
Pizzas in the ‘Favourites range’ were then cut from $11.95 to $8.50 and two other pizza ranges were cut from the menu entirely. The franchisees claimed that this Value Strategy was not profitable and caused their businesses substantial loss.
The Value Strategy and franchise profit in Australia
The franchisor justified the Value Strategy based on:
• a successful market testing of the $4.95 Classics range in a store located in the ACT
• a successful campaign previously implemented in New Zealand
• gaining ‘first mover advantage’ over their rival Dominoes.
Whilst franchisees would not make a profit on each individual pizza sale, their profit and benefit would arise from the side orders purchased by customers enticed by the low cost pizzas. The formula behind the Value Strategy also required the input of additional labour in order for franchisees to achieve a profit.
Pizza Hut would have been the only party in the market offering $4.95 pizzas. This would give them a distinct advantage over Dominoes, who would still be offering full price pizzas. Unfortunately for Pizza Hut, the cat was let out of the bag early and Dominoes pre-empted the Value Strategy by ...
In November 2014, the Australian Government released the new Franchising Code of Conduct (New Code) to take effect from 1 January 2015. The New Code will apply to all franchise agreements, subject to some transitional exceptions.
It is crucial for both franchisors and franchisees to understand the ramifications of the New Code on franchise agreements.
A summary of the key changes are set out below:
Duty to act in good faith
This obligation will apply the common law duty of good faith to all parties in a franchise relationship, including during negotiation or dispute resolution, and will set out some non-binding indicative factors as to what that duty requires.
Post agreement restrictions on restraints of trade
Where the franchise agreement is not renewed at the end of the term, a restraint provision will no longer be enforceable without reasonable consideration. However, the franchisor’s intellectual property will continue to remain protected under the New Code.
The requirements of a disclosure document have also been modified in the New Code. These include, for example, certain disclosures around the supply of goods and services in relation to online sales as well as dealing with arrangements at the end of the franchise agreement. The New Code will also require a franchisor to provide an information sheet containing an overview of the risks associated with franchising.
The "double disclosure" requirement has also been removed, with franchisors who appoint master franchisors no longer required to provide a separate disclosure document to a franchisee. The master franchisor will now be required to disclose certain information about the head franchisor in their disclosure document.
A transitional period exists which allows franchisors to use an existing disclosure document up until 1 November 2015.
Financial penalties for breaches of the New ...
Pizza Hut recently implemented a sales strategy that placed a cap on the price its franchisees could charge for a pizza. The sales strategy was launched by Pizza Hut to remain competitive in the market, particularly in relation to its rival Dominos, as well as in response to a downward trend in financial performance and a loss of customers over the past decade.
The strategy essentially involved restricting the maximum price for pizzas sold by franchisees, and reducing the number of pizza products on the menu (the Strategy).
80 disgruntled Pizza Hut franchisees sought an interlocutory injunction restraining the franchisor’s parent company, YUM! Restaurants Australia Pty Ltd (Yum), from implementing the Strategy (the Injunction).1
The Injunction was sought by the franchisees on two primary grounds:
- the implementation of the Strategy breached implied terms of the franchise agreement, including a duty to act in good faith, reasonably and/or honestly; and
- implementing the Strategy involved unconscionable conduct in contravention of section 21 of the Australian Consumer Law (the ACL). 2
Section 21 of the ACL prohibits unconscionable conduct in connection with the supply of goods and services.
On 24 June 2014, the Federal Court declined to grant the Injunction. The Court expressed the view that due to the deterioration of profits and brand recognition, the Injunction would prevent Yum from competing effectively on price and that it would be rational for Yum to implement a sales strategy. There was no evidence that Yum was acting in its own interests at the expense of its franchisees, and the Court accepted evidence presented by Yum that it would act rationally in response to the practical application of the Strategy.
Additionally, it was necessary to take into account the adverse impact the injunction would have ...
Purchasing an existing franchise? Things to consider
Purchasing a franchise is an exciting time, but the length and complexity of the legal documentation and other considerations to take into account can be quite daunting. When purchasing an existing franchised business, there are a number of factors to consider.
Some of these considerations include:
- the terms of the contract of sale. These should be conditional upon the terms of the franchise agreement being acceptable to the buyer;
- the most appropriate entity with which to purchase the franchised business and which delivers the greatest asset protection and taxation benefits;
- the terms of the business premises lease associated with the franchise;
- whether the assets of the franchised business are encumbered; and
- the terms of the franchise agreement. This document contains the key elements of the relationship between a franchisor and franchisee, including:
- initial and ongoing franchise fees;
- termination and default;
- supply of goods and services;
- other financial payments, such as marketing fees;
- restraint of trade;
- disclosure requirements;
- intellectual property;
- pricing; and
- dispute resolution procedures.
The form of the franchise agreement should reflect the practical commercial working of the business rather than be structured purely on legal considerations. Franchise agreements by their nature have enormous variety from one to the next and there are also a number of different permutations such as master franchise agreements, multi-unit franchise agreements, area development franchise agreements and joint venture agreements.
Prior to entering into a contract for the purchase of a franchised business, all prospective franchisees should seek legal advice from specialists in the franchising sector.
At Rouse Lawyers, we have ...