Franchising Code Amendments - Termination

The Franchising Code of Conduct (the Franchising Code) was amended on 1 June 2021, with most amendments applying from 1 July 2021, including the Exit and Termination amendments.

In relation to exit and termination, the Franchising Code has been amended to:

• provide franchisees with a process to request early termination of their franchise agreements;
• extend the cooling off period to 14 days;
• allow franchisees who purchase a franchise from an existing franchisee to rely on cooling off provisions;
• provide that cooling off periods only commence on the provision to prospective franchisees of all necessary documentation, including where relevant, commercial leases;
• require franchisors to provide 7 days' notice of termination of a franchise agreement in the special circumstances set out in the Franchising Code.

Early Termination Request

A franchisee may want to exit the franchise agreement for a variety of reasons, including personal financial hardship or a change in market conditions.

Under the new clause 26B of the Franchising Code, a franchisee is able to propose the early termination of the franchise agreement and the terms on which the early termination will occur.

The franchisor must then provide a written response to the franchisee's proposal within 28 days.

If the franchisor refuses the franchisee's proposal, the franchisor's written response to the franchisee's proposal must include reasons why the franchisor is refusing the franchisee's proposal. The response must be substantive. That is, the franchisor cannot just say "no".

The good faith provisions set out in the Franchising Code apply to any negotiations about the early termination of the franchise agreement.

If a franchisee has already requested an early termination of the franchise agreement, and the franchisor is refusing the franchisee's request or proposal, the franchisor is not required to provide a written response to the franchisee.

However, if the further proposal for an early termination of the franchise agreement sets out reasons which are different from the reasons given in the earlier proposal, and the franchisor refuses the further proposal, the franchisor is required to provide a written substantive response to the franchisee's further proposal within 28 days.

The new provisions provide an avenue for franchisees to start to negotiate the early termination of a franchise agreement. The new provisions do not give franchiees the right to exit the franchise agreement on demand.

Termination in Special Circumstances

Clause 29 of the Franchising Code - termination in special circumstances has been amended.

Currently, a franchisor is able to terminate a franchise agreement immediately in the following circumstances:

• the franchisee no longer holds a licence that the franchisee must hold to carry on the franchised business;
• the franchisee becomes bankrupt, an insolvent under administration or a Chapter 5 body corporate;
• the franchisee is a company that is deregistered by ASIC;
• the franchisee voluntarily abandons the franchised business or the franchise relationship;
• the franchisee is convicted of a serious offence;
• the franchisee operates the franchised business in a way that endangers public health or safety;
• the franchisee acts fraudulently in connection with the operation of the franchised business.
  

From the 1 July 2021, a franchisor is required to provide a franchisee with 7 days' written notice if the franchisor proposes to terminate the franchise agreement on one of the grounds set out above.

In addition, if the franchisee disputes the grounds of the proposed termination, they may notify the franchisor of the dispute and commence the dispute resolution process (the ADR Process).

If there is a dispute raised, the franchisor cannot terminate the franchise agreement until after the end of 28 days from the provision of the proposed  termination notice.

During the 28 day period:

• the parties can complete the ADR Process (the ADR Process is expidited under clause 29(4)(c)); or
• the franchisee can commence urgent proceedings to prevent (or injunct) the termination.

If the franchise agreement allows the franchisor to do so, the franchisor may step in and stop the franchisee from operating the franchise business while the ADR Process is underway. If the franchisor requires the franchisee to stop operating the franchise business, the franchisor must provide the franchisee with written notice under clause 29(5) of the Franchising Code, specifying a ground in clause 29(1) (set out above), for example that the franchisee has acted fraudulently in connection with the operation of the franchised business.

Cooling Off

The cooling off period in clause 26(1) of the Franchising Code has been extended to 14 days.

New Lease Provisions - Clause 26(1B) and Clause 26(1C)

In addition, where the franchisee is to lease the premises from the franchisor or an associate of the franchisor, or the franchisee is to occupy the premises under another right and the lease is not yet in force, the franchisee can terminate the franchise agreement 14 days after receiving the terms of the proposed lease or right to occupy.

There is a further 14 day cooling off period that applies if the final terms of the lease or right to occupy are not substantially identical to the proposed terms.

The new lease provisions set out in clauses 26(1B) and 26(1C) of the Franchising Code do not apply to:

• the renewal of existing franchise agreements;
• the extension of the term or scope of an existing franchise agreement; or
• the transfer of an existing franchise agreement where the new franchisee does not have to enter into a new franchise agreement (transfers are dealt with under clause 26A of the Franchising Code). 
  

Transfers - Clause 26A

Clause 26A of the Franchising Code extends cooling off rights to incoming franchisees who are taking the transfer of an existing franchise agreement. The cooling off period expires at the earlier of:

• the period 14 days starting the day after the new franchisee becomes the franchisee for the purposes of the franchise agreement;
• the period ending on the day the new franchisee takes possession and control of the franchised business. 

If the cooling off right is exercised within the time frames set out above, the franchise agreement will revert to the previous franchisee and the previous franchisee will be reinstated as the franchisee.

The clause also provides for repayments to be made to the new franchisee in the event that the new franchisee exercises their cooling off right. A repayment (being a payment of all payments made by the new franchisee to the franchisor less the deduction of reasonable expenses), must be provided within the period of 14 days starting on the day after the cooling off notice was given.

In addition to the franchisor, if the new franchisee cools off, the previous franchisee must repay to the new franchisee all payments made by the new franchisee to the previous franchisee (less the previous franchisee's reasonable expenses), within the period of 14 days starting on the day after the cooling off notice was given.

The failure to repay payments made within the 14 day period may result in the application of a civil penalty.

Takeaways

The amendments to the exit and termination provisions set out in the Franchising Code are substantial.

Franchisors in particular, will need to be aware of their new obligations under the Code. These include:

• considering a franchisee's request for early termination in good faith and providing a substantive response within 28 days;
• initially providing 7 days' notice of any proposed termination for any of the circumstances set out in clause 29(1) of the Franchising Code.

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.