The Exposure Draft of the Franchising Code of Conduct has been released, with the Government inviting public feedback until 29 October 2024.
In our last article I considered the proposed changes to the Franchising Code of Conduct (the Code) arising from the 2023 Review of the Scope of the Regulation of the Code.
In this article I will provide an overview of the proposed changes to the requirements "Before a Franchisee Enters into a Franchise Agreement", and their implications for franchisors and franchisees.
The full copy of the Exposure Draft and the Explanatory Statement can be read here.
The infographic below sets out the recommendations and Government findings arising from the 2023 Review of the Franchising Code of Conduct, relating to the category "Before Entering into a Franchise Agreement".
While the Exposure Draft includes the amendments that the Government indicated that it would make, there has been no decision about licensing franchisors, and no indication of what, if any, amendments will be made to the information required to be included in the Franchise Disclosure Register.
As foreshadowed in the Government's response to the 2023 Review, the Government has removed the requirement that a franchisor provide a franchisee with a Key Facts Sheet (and consequently the requirement that a franchisor maintain a Key Facts Sheet).
I note that the requirement to provide a franchisee with a Key Facts Sheet was introduced in 2021 and has increased the regulatory burden while providing little benefit.
Given that the Exposure Draft will not come into effect until 1 April 2025, franchisors will still need to update their existing Key Facts Sheet prior to 31 October 2024.
The Information Paper provided with the Exposure Draft explains that any information included in the Key Facts Sheet which is not currently included in the pro-forma disclosure document, will be included in the updated pro-forma disclosure document.
The Government has introduced opt-out provisions for existing franchisees, meaning that existing franchisees can opt-out of receiving a disclosure document on renewal (Sections 22(4) and 23(4) of the Exposure Draft). In addition, existing franchisees can opt-out of the 14 day cooling off period (Sections 47(7) and 49(4) of the Exposure Draft).
The existing franchisee must notify the franchisor in writing if the franchisee wishes to opt-out.
In my view, it is unlikely that this amendment to the Code will simplify disclosure obligations for existing franchisees.
Section 43 of the Exposure Draft extends to all franchise agreements the provisions already applicable to new vehicle dealership agreements, that franchisees must have a reasonable opportunity to recoup any capital investment required by the franchisor.
It is proposed that Section 43 be a Section 16 civil penalty provision.
The Explanatory Statement explains that what is considered a "reasonable opportunity" will be specific to the terms of the franchise agreement, the costs paid and the length of the franchise agreement. The Explanatory Statement then goes on to state that Section 43, "is intended to ensure that the term of a franchise agreement is consistent with the level of capital investment required".
In its response to the recommendations provided by the 2023 Review, the Government advised that it would extend the obligation that franchise agreements must include provisions for compensation if the franchise agreement is terminated early, to all franchise agreements.
Section 42 of the Exposure Draft provides that a franchisor must not enter into a franchise agreement unless it provides for compensation for early termination in certain circumstances.
Again, it is proposed that Section 42 be a Section 16 civil penalty provision.
Importantly, under the proposed regulations, a franchise agreement must contain provision for compensation if a franchise agreement is not renewed and the franchisor does not enter into a new franchise agreement. This includes requirements for the franchisor to buy back or compensate the franchisee for all outstanding stock of the franchise business purchased by the franchisee, where those things were specified by the franchisor and required in order to operate the franchise business in line with the franchise agreement or any operations manual (or similar document).
The Explanatory Statement provides that this would also include all essential specialty equipment, branded product or merchandise purchased or maintained by the franchisee that could not be repurposed for a similar business and any other thing that the franchisee was required to purchase or maintain for the purposes of the franchise.
The amendments to the Code arising from the 2023 Review in relation to the category "Before a Franchisee Enters into a Franchise Agreement" reflect the Government's response to the 2023 Review.
While the removal of the requirement to provide a Key Facts Sheet will simplify the disclosure process after 1 April 2025, it is unlikely that the opt-out provisions applying to existing franchisees will have any effect.
Disclaimer
The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.