26/08/2009

You’ve signed a Franchise Agreement as franchisee and now you’ve realised you don’t want to go ahead with it.  You’ve paid a deposit prior to signing the Franchise Agreement. Under what circumstances can you demand a refund of the deposit?

All Franchise Agreements in Australia are covered by the Franchising Code of Conduct (the “Code”). The Code sets out various rights and obligations of both the Franchisor and the Franchisee. One of the things the Code deals with is deposits requested by, and paid to, Franchisors.

Under the Code, a Franchisee must receive from the Franchisor a copy of the Code, a Disclosure Document and a copy of the Franchise Agreement in the form in which it is to be signed at least 14 days before the prospective Franchisee makes a non-refundable payment to the Franchisor in respect of the proposed Franchise. In addition, the Franchisor must not accept a non-refundable payment under a Franchise Agreement unless the Franchisor has first received from the Franchisee a written statement that the Franchisee has received, read and had a reasonable opportunity to understand the Disclosure Document and the Code.

These provisions mean that if a Franchisee has made a payment to a Franchisor before:

(a)   14 days has elapsed since the Franchisee was given a copy of the relevant documents;or

(b)   providing the Franchisor with the requisite written statement;

the payment is fully refundable until those two requirements are met.

These provisions do not preclude a Franchisor from requesting and accepting a deposit from a prospective Franchisee. For example, the Franchisee may be asked to pay a deposit when they lodge an application for the franchise documentation with the Franchisor. This enables the Franchisor to assess whether the prospective Franchisee is a genuine prospect.  Provided the deposit is fully refundable, the Franchisor may ask for this deposit before the client receives the documents. 

Other relief under the Code is provided by the “cooling off” period. The Code provides for a seven day cooling off period after the Franchise Agreement has been signed. The cooling off period is to allow Franchisees to think about their decision to enter into the Franchise Agreement; because the Code recognises that people change their minds after signing the Franchise Agreement because they were caught up in the excitement of the process or were pressured into it.

During the cooling off period Franchisees can withdraw from the signed Franchise Agreement without losing their deposit. However, in this situation Franchisees may be charged for any reasonable costs that the Franchisor incurred up to that time (such as lawyer’s fees). Therefore, it is better to not sign the proposed Franchise Agreement, or give the required written statement, if there are any doubts about going ahead with the franchise. If you do sign, but are then unsure, take advantage of this time to evaluate your decision and seek more advice if necessary. 

If you have any questions or would like advice on Franchisee or Franchisor Rights and Obligations, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.