From November 2021, franchisors must include new information in their disclosure documents for prospective franchisees.
Summary of new disclosure document requirements
Franchisors need to be aware of important changes to the pre-entry disclosure obligations of franchisors. Your disclosure documents must now include additional information on:
- lease arrangements,
- franchisee goodwill rights,
- capital expenditure, and
- instances of dispute resolution or arbitration that have occurred within the previous financial year.
Additionally, you need to provide prospective franchisees with a Key Facts Sheet highlighting the most important information in the disclosure document.
Other Franchising Code amendments
Earlier amendments came into effect last July. The amendments were implemented in response to the Fairness in Franchising report handed down on 14 March 2019. As well as the more onerous disclosure obligations, some of the key recommendations from this report that have now been implemented are:
- extending the cooling off period in franchise agreements, and
- enhancing the collective powers of franchisee groups in dispute resolution.
Stemming from these recommendations, the amendments are intended to provide better protections to franchisees, improve fairness and transparency in franchising, and ultimately promote enhanced competition and fair trading within the sector.
Dispute resolution and termination changes
Options for alternative dispute resolution have been expanded and now include conciliation, mediation and arbitration.
By agreement with the franchisor or through the Australian Small Business and Family Ombudsman, multiple franchisees with similar disputes can now collectively participate in arbitration. Franchisees with similar disputes are permitted to discuss the nature of their disputes with one another when determining whether to act collectively, even if this would otherwise breach confidentiality clauses within their franchise agreements.
The cooling off period after a franchise agreement has been entered into has been extended from 7 days to 14 days. A franchisee now also has 14 days to terminate their franchise agreement after being provided with a proposed lease by the franchisor. Additional changes to termination requirements enable franchisees to dispute ‘special circumstances terminations’, of which they must be given 7 days’ notice by the franchisor.
Capex, marketing funds and legal costs
The prohibition on significant capex for franchisees has been extended from the auto industry to the rest of the market.
Franchisors should familiarise themselves with the changes for administering marketing funds, in addition to the new disclosure requirements and increased penalties for marketing fund non-compliance.
There is also a limitation on passing legal costs through to franchisees.
Restraint of trade clauses
Franchisors are now more limited in their ability to enforce restraint of trade clauses. A restraint will only have effect during the franchise term, and not after termination, unless the franchisee was in serious breach of the agreement immediately before termination.
Moving forward
These amendments cover many areas and place a number of more onerous obligations on franchisors when entering into agreements with franchisees. The ACCC has made a useful summary of the key provisions of the Franchise Code. In light of these changes, it is important for franchisors to ensure their franchise agreements and disclosure documents comply with these requirements.
Author: Andrew Geraghty, paralegal.