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- Franchising Update – Changes to the Franchising Code of Conduct

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Franchising Update – Changes to the Franchising Code of Conduct

The Federal Government’s most recent amendments to the Franchising Code of Conduct came into effect on 1 March 2008.

The amendments require several changes to be made to the Disclosure Document in relation to their Franchise that franchisors must update for each prospective franchisee (and at least annually), particularly:

• First page
  The first page of the disclosure document now must have an additional paragraph which makes it clear that the franchisor may keep part of any deposit paid by the franchisee if the franchisee terminates the agreement during the cooling off period.

• Directors and officers details
  The name, position held, qualifications and business experience must now be disclosed for each “officer” of the franchisor in addition to each director. “Officer” means any person who makes decisions that affect a substantial part of the company or who has the capacity to significantly affect the company’s finances.

• Proceedings against directors
  Proceedings against a director of the franchisor must now be disclosed in addition to proceedings against the franchisor itself, and the content of any order or undertaking by the franchisor to the ACCC must also now be disclosed.

• Rebates
  The Disclosure Document must now also disclose the name of all parties that give rebates or other financial benefits to the franchisor or an associate in connection with the supply of goods and services. However, the amendments do not require details of those financial benefits to be disclosed.

• Past franchisee’s details
  Details of past franchisees who have exited the system in the past three years, including name, location and contact details must now be disclosed (unless a past franchisee has requested their information not be given).

• History of the site
  Where the site to be franchised has been subject to previous franchise owners, the franchisor must provide a separate document to prospective franchisors with the details and history of the site.

• Audits of consolidated entities
  Upon request by a franchisee, the franchisor must include audited financial reports for the consolidated entity to which it belongs where it is part of a corporate group.

• Obligations and other conditions
  The franchisor’s obligations, franchisee’s obligations and summary of other conditions of the agreement must now specifically refer to the relevant conditions of the Franchise Agreement, rather than merely summarising the conditions.

In addition to updating their Disclosure Documents, franchisors should be aware of the following additional obligations placed on them when dealing with prospective franchisees since 1 March 2008:

• Copy of Franchise Agreement
  The copy of the Franchise Agreement provided to a prospective franchisee must be in the form in which it is to be executed, and it must be given at the same time as the Disclosure Document (i.e. 14 days before the prospective franchisee enters into the Franchise Agreement).

• Copies of related agreements
  All related agreements (such as leases, asset purchase or rental agreements, security agreement, etc) must also be provided to prospective franchisees at least 14 days prior to the Franchise Agreement being executed, or as soon as the become available.

• Prohibition on waiver of written or verbal representations
  A Franchise Agreement can no longer contain a waiver of written or verbal representations made to potential franchisees. Therefore, franchisors cannot avoid liability under the Code or the Trade Practices Act by relying on such a waiver. Note that this also applies to existing franchisees wanting to extend their Franchise Agreements.

• Foreign Franchisors
  A foreign franchisor that grants only one franchise or master franchise to be operated in Australia is no longer exempt from complying with the Code, including the need to provide a Disclosure Document. This will affect not only new franchisors to Australia, but existing foreign franchisors.

• Short form Disclosure Document
  The rarely used short form Disclosure Document (Annexure 2 of the Code) is likely to be used even less often, with changes meaning that it cannot be used if the expected turnover of the expected business is greater than $50,000 per annum at any time during the term of the Franchise Agreement.

• Freedom of association
  Prospective franchisees can now freely associate in addition to existing franchisees.

Finally, franchisors should be aware of the following changes which impact their dealings with existing franchisees:

• Current Disclosure Document on renewal or extension
  A current Disclosure Document must be provided to a franchisee whenever a Franchise Agreement is renewed or when the scope or term of a Franchise Agreement extended.

• Auditing of marketing fund
  Where there is a marketing or cooperative fund established by the Franchise Agreement, the franchisor must now provide a financial report to all franchisees (instead of providing the report on request). Franchisors now have four months (up from three) to prepare the report and have it audited. The requirement to prepare the report can still be waived if 75% or more of the contributing franchisees agree, but such a waiver must now be voted on every two years.

• Disclosure outside of the Disclosure Document
  Where disclosure of material relevant facts not already in the Disclosure Document is required under clause 18 of the code (such as a change in control of the Franchisor or involvement in legal proceedings, etc), Franchisors must now inform a franchisee (or prospective franchisee) within 14 days (down from 60 days).

• Disclosure of ACCC undertakings
  The Franchisor must disclose undertakings given to the ACCC under the Trade Practices Act within a reasonable time (no more than 14 days).

Please do not hesitate to contact Robert Toth, Partner, on 9612 7297 or rxt@wisewoulds.com.au with any queries in relation to the above or for advice or assistance in updating your Disclosure Document.