02/08/2010

Recently, the Franchising Code of Conduct was amended by the Australian Government.  The changes apply to franchise agreements entered into on or after 1 July 2010.  They also relate to franchise agreements transferred, renewed or extended on or after 1 July 2010.

What are the amendments?
Some of the significant amendments include increased disclosure obligations on franchisors including:

• a warning statement that the franchise business could fail, with adverse consequences on the franchisee;
• details of any payments to third parties payable by the franchisee that the franchisor knows about or is in control of, including those payments that the franchisor ought to have reasonably foreseen;
• unforeseen significant capital expenditure that the franchisor did not disclose before the franchisee entered into the franchise agreement;
• any unilateral variations to the franchise agreement made or which may be made by the franchisor;
• whether the franchisor will impose confidentiality obligations on the franchisee;
• details of end-of-term arrangements such as whether the franchisee will have an option to renew, right to sell the business, and what happens to any unsold stock.
  

Apart from the increased disclosure requirements, other substantive amendments to the Code include:

• the rules that apply to transfer now also apply to novation of franchise (a new franchise agreement granted to the new franchisee at the request of the existing franchisee);
• the requirement that the franchisor must inform the franchisee at least six months before the end of the franchise agreement regarding whether or not they wish to renew the agreement.  If the term of a franchise agreement is less than six months, the franchisor will be required to give at least one-month notice before the end of the term;
• the requirement that a new disclosure statement be provided to the franchisee before the renewal of the agreement;
• the provision that in the event of a dispute, both parties must attempt to resolve the dispute in a “reconciliatory manner”, and that both parties will be equally liable for the costs of mediation.
  

Actions required by franchisors
In light of these changes, we recommend that all franchisors review and update their disclosure documents and franchise agreements for compliance at the very least, and seek professional advice in relation to their franchise disclosure practice.

If you would like our assistance to safeguard your franchise business against potential breaches of the amended Code, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.