Update on proposed changes to Franchise Code – October 2024

On 9 October 2024 the Australian Treasury released the long-awaited exposure draft changes to the Competition and Consumer (Industry Code-Franchising) Regulations 2024 (Code) (along with explanatory memorandum and information paper) setting out the latest changes aimed at implementing the Government’s response to the independent review by Dr Michael Schaper.

The Government has requested that submissions in response to the proposed changes to the Code be provided by 29 October 2024. This is a very short time frame. The exposure draft contains proposed changes only, which may be subject to further changes as a result of the submissions received.

Perhaps the most controversial of the proposed changes is the requirement for franchisees to be provided with a reasonable opportunity to make a return on their investment. This new provision expands provisions that applied previously to new vehicle dealership agreements so that now all franchisees are to be provided with a reasonable opportunity to make a return on their investment. What is considered a reasonable opportunity will be specific to the terms of the particular agreement, the costs payable by the franchisee and the term of the agreement. If expenditure is disclosed in a disclosure document for a franchise agreement, the circumstances in which the expenditure is likely to be recouped must be discussed in the disclosure document.

A further key change to the Code has been included expanded again from new vehicle dealership agreements to all franchisees. All franchise agreements must include provisions for early termination of the franchise agreement in specific circumstances because the franchisor:

(i)         withdraws from the Australian market; or

(ii)        rationalises its networks in Australia; or

(iii)       changes its distribution model in Australia

The franchise agreement must specify how the compensation is to be determined, with specific reference to the following:

(i)         lost profit from direct and indirect revenue;

(ii)        unamortised capital expenditure requested by the franchisor;

(iii)       loss of opportunity in selling established goodwill;

(iv)       costs of winding up the franchised business.

The franchise agreement must contain provisions for the franchisor to buy back or compensate the franchisee for “things” being stock, specialty equipment and branded merchandise and “any other thing that the franchisee was required by the franchisor to purchase or maintain for the purposes of the franchise”.

In summary, the key proposed changes to the Code are:

• To renew the Code which is currently due to expire on 1 April 2025 while aligning the formatting with contemporary drafting standards.
• Insert a clear statement of purpose for the Code to identify specific objectives (including addressing the power imbalance between franchisors and franchisees).
• Extending the scope of the Code to now capture service and repair work performed by motor vehicle dealerships conducted by dealers or associated with a dealership agreement that buy, sell, exchange or lease motor vehicles.
• A requirement for the Code to be reviewed every five (5) years to ensure it is operating effectively and efficiently.
• Removing the requirement for franchisors to provide a separate key facts sheet by merging this information into the disclosure document.
• Providing existing franchisees with the ability to opt-out of the requirement to receive a disclosure document and the fourteen (14) day cooling off period.
• Simplification of the termination provisions for serious breaches by franchisees (allowing the franchisor to terminate with seven (7) days’ notice and no requirement to undertake alternative dispute resolution for certain breaches).
• Requirement for all franchise agreements to provide the franchisee with a reasonable opportunity to make a return on their investment during the term of the agreement.
• Requirement to include provisions for compensation for early termination in specific circumstances (including outstanding stock, essential speciality equipment and branded products that cannot be repurposed for a similar business).
• Additional powers conferred on the Australian Small Business and Family Enterprise Ombudsman to name franchisors who have not participated meaningfully in alternative dispute resolution.
• Increase the scope of penalties and infringement notices along with investigation powers under the Code.

Once all submissions have been received, the Australian Treasury will consider whether any further changes to the exposure draft are to be made.