On 1 June 2021, the Australian Government made long-awaited amendments to the Franchising Code of Conduct (Code) including changes to the Disclosure Document to be provided to franchisees.
Franchise Agreements entered into, renewed or extended on 1 July 2021 will be required to comply with the amended Code. However, some transition periods are different. Most of the regulations that change what’s in the Disclosure Document will apply to Disclosure Documents to be given from 1 November 2021. This coincides with the time that many franchisors will be updating their Disclosure Documents for the end of the financial year (noting the requirement for Disclosure Documents to be updated within 4 months of the end of the franchisor’s financial year). Those franchise systems that have a different financial year will still need to create a new Disclosure Document from 1 November 2021 to incorporate these changes.
Given the above, all Franchisors must ensure that they have reviewed and updated their Disclosure Document to comply with the Code changes from 1 November 2021.
Post 1 November 2021, the Disclosure Document must include additional information that must be disclosed to franchisees or prospective franchisees. This information aims to support franchisees in accessing and evaluating commercial information in relation to the franchise system prior to entering into the Franchise Agreement. In particular, additional disclosure is required in relation to:
If a franchisor discloses capital expenditure in a Disclosure Document, they must now include as much information as possible about such expenditure. In particular, the franchisor must include 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.
Before these amendments, a franchisor could make a franchisee take on significant capital expenditure on the basis that it was a necessary investment in the business. This is no longer permissible under the changes to the Code.
In addition to disclosing litigious disputes, franchisors now need to disclose the percentage of franchisees that participated in an alternative dispute resolution process (mediation or conciliation) or arbitration in the previous financial year and whether the disputes were initiated by the franchisor or one or more franchisees.
The Disclosure Document must also provide whether franchise agreement provides for arbitration of disputes in a manner consistent with Subdivision C of Division 3 of Part 4 of the Code.
A franchisor must now also disclose any restraint of trade clause or similar relating to periods after conclusion of the franchise agreement as a separate item of disclosure within the Disclosure Document.
The Disclosure Document must provide details of the franchisees’ rights to any goodwill generated by the franchisee upon termination of the franchise agreement as a separate item of disclosure within the Disclosure Document.
Franchisors need to disclose expanded details of any rebate or financial benefit which they might receive from a supplier in connection with the supply of goods or services to the franchisee including:
The amended Code exempts franchisors from disclosing this information if the franchisee is permitted to source goods or services from sources and not require the franchisor’s approval or where the rebate or franchisee is paid or returned directly to the franchisee or via a cooperative fund.
If earnings information is provided to prospective franchisees, then it must be either provided in the Disclosure Document or in a separate attachment (and if given to a prospective franchisee earlier, must be repeated in the Disclosure Document). In addition, a franchisor providing earnings information in a Disclosure Document must now sign off to a specific statement that the information given is, to the best of the franchisor’s knowledge, accurate.
The Disclosure Document must provide a summary of the rights the franchisor and franchisee have to terminate the franchise agreement before it expires and the circumstances in which those rights may be exercised as a separate item contained within the Disclosure Document.
If the franchisor or an associate leases premises that are to be sublet to the prospective franchisee, then a copy of the lease (or a summary of the commercial terms if the lease is unavailable) must be provided together with the Disclosure Document in addition to any written information in connection with the lease required by state or territory law.
If the full lease details are not provided with the Disclosure Document, the cooling off period does not start to run.
Franchisors must now also ensure that:
The Key Facts Sheet must be given to prospective franchisees at least 14 days before entering into, renewing or extending a franchise agreement or paying any non-refundable money or to any franchisee who asks for a Disclosure Document in writing. The Key Fact Sheet must be updated when the Disclosure Document is updated and reflect the information in the franchisor’s current Disclosure Document.
Legislation to increase fines for breaches of the Code included in the Treasury Laws Amendment (2021 Measures No. 6) Bill 2021 has been passed in the Australian parliament.
Franchisors now risk increased financial penalties for breaching the Code with the increasing of maximum civil pecuniary penalty units from 300 to 600 penalty units, which based on the value of a penalty unit as at today’s date means fines of up to $133,200. For a breach of the Code by a corporation, the maximum civil penalty available under the Code will be the greater of $10 million, or three times the value of the benefit that caused the breach, or 10% of the franchisor’s turnover for the 12 months prior to the breach. For non-corporations, the maximum civil penalty will be $500,000.
The increase in penalties has been driven as a means to encourage greater compliance and provide a strong deterrent against breaches of the Code across the franchising sector.
It is extremely important to ensure that Franchisors update their Disclosure Documents by 1 November 2021 under the Code to reflect the new information required to be disclosed. The above changes need to be carefully integrated into the Franchisor’s existing Disclosure Documents noting the penalties for non-compliance.
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