Following the release of the Fairness in Franchising Report and industry consultation, the Australian government has made some changes to the Franchise Code of Conduct (the Franchise Code). ...
PROPOSED CHANGES TO THE FRANCHISING CODE
The Government issued its response to the inquiry into the operation and effectiveness of the Franchising Code of Conduct report on 20 August 2020.
The Government examined the feasibility of a number of the recommendations made in the Report.
The Government recognised the importance of the franchising sector to the economy as a source of jobs and growth and supported the finding that action is needed to improve fairness and transparency for franchisees.
However, a number of recommendations made in the Report will not be adopted so as to avoid unnecessary red tape.
Interestingly, the Opposition introduced a Bill into the senate on 2 September 2020. The Bill focuses on introducing arbitration into the dispute resolution process but also proposes further increases to penalties for breaching the Franchising Code of Conduct.
Until the changes are made final it is hard to say whether all of the proposed reforms in the Response will be made and what this means from a practical perspective. The Government has not announced its timing for introducing its amendments to the Franchising Code. It is expected to occur later this year or early next year. The Opposition Bill may impact this timing.
GOVERNMENT RESPONSE AND KEY CHANGES
KEY DISCLOSURE INFORMATION FACT SHEET
- Require a franchisor to prepare and give to a prospective franchisee a Key Disclosure Information Fact Sheet containing prescribed financial and other information. This may be for a new (greenfield) franchise or an existing franchise.
- Require a disclosure document to be made available both in electronic and hardcopy form.
- To clarify that the Information Statement (Annexure 2 to the Franchising Code) must be provided to prospective franchisees separately and prior to providing the disclosure ...
Table of Contents
- What Can Franchisees Do to End the Franchise Agreement?
- What can Franchisors Do to End a Franchise Agreement?
- Terminating a Franchise Agreement
- Terminating a Franchise Agreement Under the Terms of the Contract
- Other Ways to Terminate a Franchise Agreement
- What are the Consequences of Terminating a Franchise Agreement?
A franchise agreement is a legally binding commitment for the term of the franchise with restrictions on exiting early.
Franchisors and franchisees must follow different steps if they believe they have grounds to unilaterally terminate the agreement. This will always depend on the circumstances.
What Can Franchisees Do to End the Franchise ...
Earlier this year, following a series of negative comments in Australian media about franchising industry, the Parliamentary Joint Committee on Corporations and Financial Services completed an inquiry into the operation and effectiveness of the Franchising Code of Conduct.
As the result of the inquiry, the Committee released the “Fairness in Franchising” report.
On a broad scale, the Report recommended:
- stronger, tougher regulation of the franchising industry
- new and higher penalties for breaches of the Code
- more responsibilities and greater enforcement power for the ACCC
Not all the recommendations have been welcomed by the industry with noticeable controversies and stir among the insiders.
Regardless of the reactions the Report had generated, we believe significant changes to Australia’s franchise laws are coming.
Let’s look at some of the key recommendations made by the Committee:
Franchise Termination Rights
A franchisee may terminate a franchise agreement without liability to the franchisor where:
- a franchisee suffers personal hardship or is over-geared and unable to restructure their finances or sell the business under the assignment provisions of the Code; or
- a franchisee’s EBITDA has been negative for three fiscal quarters, the franchisor would be responsible for meeting the terms and conditions of breaking any third-party leases.
Stricter Disclosure Obligations
It is a common practice among many franchisors not to disclose earning information, at least not in writing, to incoming franchisees. Instead, they prefer to use general market data or inform them verbally about the state of the business.
To stop this, the Committee recommended franchisors to provide incoming franchisees with a profit and loss statement, balance sheet, previous two years’ business activity statements and an assessment of labour costs.
Collective Bargaining and Dispute Resolution
A breach notice is a document you should never ignore — fail to act on it and your business may be at risk.
Formal breach notices are generally issued once a franchise dispute escalates and a conciliatory resolution cannot be achieved.
However, this is not always the case because some franchisors may resort to issuing a breach notice straight away.
What is a Breach Notice?
Under the Franchising Code of Conduct (Code), a franchisor is permitted to terminate a franchise agreement if they give you a breach notice and you fail to remedy your breach in accordance with the requirements of the notice. A breach notice is the first step in the termination process and used as a formal warning that your business is non-compliant.
A breach notice must:
- specify the provision of the franchise agreement which has been breached;
- set out what you are required to do to remedy the breach; and
- provide a reasonable time for you to remedy the breach.
If the franchisor wishes to rely on the breach notice to terminate the franchise agreement, the notice must also state that the franchisor proposes to terminate the franchise agreement if the breach is not remedied.
If you fully remedy your breach in accordance with the requirements of the breach notice, then the franchisor cannot rely on that breach to terminate your franchise agreement.
If you fail to comply with all conditions of the breach notice, the franchisor is entitled to terminate your franchise agreement.
Remember that there are certain circumstances under the Code which entitle a franchisor to immediately terminate a franchise agreement without following the breach notice process, such as fraudulent behaviour.
I'm in a Franchise Dispute and Have Received a Breach Notice: What Should I do?
Receiving a breach notice can be distressing, but don't ...
Your Disclosure Documents need to be updated by:
Forget to update your disclosure documents at your peril.
Franchisors must update their disclosure documents within 4 months of the end of their financial year. That means that most franchisors who operate on a standard financial year ending on 30 June must finalise their update by 31 October.
The annual update is an important part of running a franchise system and is mandatory under the Franchising Code of Conduct. It should never be overlooked lightly. ...
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Franchising is a system of doing business. As a franchisor, you have achieved a proven system for success through your brand and product consistency, and you have opted to duplicate that system by franchising.
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