Code changes deliver certainty to franchise sector

Recently announced changes to the Franchising Code of Conduct are good news for the franchise sector.

Franchisors can breathe a sigh of relief that almost exactly two years since the Government announced the start of a national inquiry into franchising, the amended regulations which will commence on July 1 at last bring greater certainty to the sector.

Likewise for potential franchisees, the changes to the Code require an even higher level of disclosure that quite possibly sets a new standard among nations which have specific franchise legislation.

The changes apply to franchise agreements entered into on or after July 1, 2010. Franchise disclosure document issued now for commencement dates early next month must therefore comply with the new changes, even though a consolidated copy of the Code incorporating all changes is not yet available.

Two elements of the new regulations – the disclosure of unilateral contract variation and unforeseen significant capital expenditure – require franchisors to disclose information relating to their activities over the past three financial years, but will require progressive disclosure in annual increments over the next three years.

Key changes to the Code are summarised as follows:

End of Term Arrangements

Franchisors must disclose to their franchisees what happens at the end of a franchise agreement, for example, whether or not a franchisee has a right to renew the franchise agreement. Franchisors will also be required to inform franchisees six months before the end of the agreement whether or not they intend to renew or enter into a new agreement. Where franchise agreements are for a term less than six months, franchisors will be required to inform franchisees at least one month prior to the end of the franchise agreement of their decision to renew or not renew a franchise agreement.

Additionally, the franchisor must disclose if it will consider any significant capital expenditure undertaken by the franchisee during the agreement, in determining the arrangements that apply at the end of the agreement (for example, renewal of the franchise agreement).

The franchisor must disclose whether, during the last three financial years, it considered any significant capital expenditure undertaken by franchisees, in determining the arrangements to apply at the end of their agreements.

Disclosure of the fact that the franchise agreement could be changed even when the franchisee is trying to sell the business.

Risk Statement

Disclosure documents must include an express statement that franchising is a business and, like any other business, the franchise could fail.

Dispute Resolution

The Code will include a list of necessary and desirable behaviours to encourage parties to approach a dispute resolution process in a reconciliatory manner (including attending and participating in meetings at reasonable times).

Franchisors must disclose whether they will attribute their costs, incurred in dispute resolution, to the franchisee, and whether franchisees may be subject to confidentiality obligations.

Good Faith

Nothing in the Code limits any common law requirement of good faith in relation to a franchise agreement to which the Code applies.

Unilateral Variation

Franchisors must disclose the circumstances in which unilateral variations to franchise agreements may take place and the circumstances in which the franchisor has unilaterally varied a franchise agreement in the past three financial years.

Capital Expenditure

Franchisors must disclose whether the franchisee, through the franchise agreement, the operations manual (or equivalent), or any other means, to undertake significant capital expenditure that was not disclosed by the franchisor before the franchisee entered into the franchise agreement.

The Code changes are consistent with previous announcements by the government and should come as no surprise to the sector. If anything, the timing of their introduction on July 1 so soon after the Minister’s announcement provides little time for franchisors to update their disclosure documents and amend their systems to ensure ongoing compliance with the new Code.

For well-established systems with access to competent advisors, the compressed timeframe in which to comply will be an inconvenience, but not an insurmountable obstacle.

However, despite the best efforts of the sector in communicating the changes and their commencement date, it is possible that some franchisors may not be fully compliant by July 1. Given the very short lead time available to prepare, it is hoped that systems which are not ready by July 1 will not be penalised too harshly.

Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 20 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues.