10 min read The Franchising Code of Conduct (the Franchising Code) includes an obligation that the franchisor and the franchisee act in good faith in their dealings with the other party. The obl…
We have set out below some of the most common questions we are being asked by franchisors and franchisees during the COVID-19 pandemic.
- Does a franchisee need to pay fees?
- Can a franchisor terminate a franchise agreement for non-payment?
- Can the products or services provided be temporarily changed?
- What if I cannot afford to pay rent?
- What does “good faith” mean?
- What do I need to think about when relaunching my business?
- Further COVID-19 Information
Does a franchisee need to pay fees?
The ACCC has indicated that during the COVID-19 pandemic franchisors should adjust fees so that franchisees are not paying for services that they are not receiving.
In addition franchisors should consider whether they can cancel or suspend any services (such as marketing) so that the savings can be passed on to franchisees.
The government has also indicated that franchisors should be working with franchisees to waive, reduce or defer franchise fees while businesses are affected by COVID-19 restrictions.
However, while there has been the suggestion that franchisors should be working to waive, reduce or defer franchise fees during the COVID-19 pandemic, there have been no legislative amendments requiring franchisors to do so.
Can a franchisor terminate a franchise agreement for non-payment?
A franchise agreement can only be terminated in accordance with the agreement and the Franchising Code of Conduct (the Franchising Code).
The Franchising Code sets out special circumstances which may allow a franchisor to terminate a franchise agreement immediately.
If the franchisor is terminating the franchise agreement for breach such as non-payment, the franchisor must provide the franchisee with a breach notice in which the franchisor must:
-tell the franchisee they are in breach;
-tell the franchisee what is required to remedy the breach; and
-allow the franchisee a reasonable time to remedy the breach.
The Franchising Code provides that a reasonable time is no more than 30 days.
Generally, if the breach notice is valid and the franchisee does not remedy the breach within the reasonable period allowed, a franchisor can terminate the franchise agreement.
However, there is an overarching obligation in the Franchising Code requiring both the franchisor and the franchisee to act in good faith. Even if a franchisor complies with the breach provisions set out in the Franchising Code, given the extraordinary circumstances, termination during the COVID-19 pandemic may be a breach of the good faith obligation.
Can the products or services provided be temporarily changed?
While the franchisor and franchisee can agree to make changes to a franchisee’s product or service offering, the franchisee does not have to agree to such a change.
If the franchisee does not agree to change the products or services offered, the franchisor cannot charge the franchisee any additional fees for the changed product or service.
What if I cannot afford to pay rent?
The National Cabinet announced the Commercial Leasing Code of Conduct (the Code of Conduct) on 7 April 2020.
One of the principles under the Code of Conduct is that landlords must offer tennants proprotionate reductions in rent payable in the form of waivers and deferrals based on the reduction of the tenants trade during the COVID-19 pandemic and subsequent period.
Not all States and Territories have adopted all of the principles set out in the Code of Conduct.
In Victoria, the Commercial tennancy relief scheme includes negotiation of rental waiver or deferral if the tenant has suffered a reduction in trade due to the COVID-19 pandemic.
In South Australia the COVID-19 Emergency Response (Commercial Leases No 2) Regulations 2020 provide that landlords and tenants must negotiate in good faith taking into account the principals in the Code of Conduct.
In Western Australia a code of conduct is being developed based on the Code of Conduct to provide a framework for negotiations to be carried out in good faith between landlords and tenants to agree on rent relief measures.
In NSW landlords are prohibited from taking or continuing any legal action against a tenant on grounds of a breach of the lease for failure to pay rent during the COVID-19 pandemic period, unless the landlord has complied with certain conditions set out under the Regulation, including:
-engaging in good faith negotiations with the tenant in relation to renegotiations of the rent; and
– having regard to the economic impacts of the COVID‑19 pandemic and the leasing principles set out in the Code of Conduct.
You need to be aware of the relevant legislation in your State.
What does “good faith” mean?
In it’s COVID-19 information release, the ACCC highlighted the need for franchisors to be aware of their obligation to act in good faith during the COVID-19 pandemic.
While “good faith” is not defined in the Franchising Code the elements required for good faith are generally considered to be
Not acting arbitrarily
Co-operating to achieve the purpose of the franchise agreement
Having regard for the interests of the other party.
However, a party is not required to act in the interests of the other party at the expense of its own interests.
It is accepted that conduct is prohibited where it harms the franchisee but it is not necessary for the protection of the franchisor’s interests.
When considering whether a franchisor is acting in good faith, the ACCC suggests that potential questions to ask include:
Is the franchisor making timely decisions?
Is the franchisor consulting with franchisees regarding issues or proposed changes?
Is the franchisor imposing conditions on franchisees that are not necessary to protect its interests?
Is the franchisor genuinely attempting to resolve the dispute?
Is the franchisor acting for some ulterior purpose?
What do I need to think about when relaunching my business?
Financial statements should be up to date and budgets should be prepared so that you can make an informed decision of what steps the business will take at each stage. For example, some businesses have decided that it is not profitable to reopen during stage 1 of the 3 stage plan, due to the limit on consumer numbers.
Before any decision is made on whether to open your business, you will need to consider the terms of any franchise agreement under which the business is operated.
In a franchise system, the ACCC has indicated that it expects franchisors to be continuously reviewing the franchise system’s processes and supply arrangements, making adjustments, and being flexible with requirements to help ensure its franchisees’ businesses remain viable.
If suppliers approved by the franchisor are not able to meet your needs, follow the process set out in the franchise agreement to seek approval of alternate suppliers.
You should think about how to re-establish connections with those consumers who may have developed new habits during the COVID-19 restriction period.
Some businesses have attracted customers during the COVID-19 restriction period that they would not otherwise have attracted. In these circumstances, consideration should be given to whether the business is able to retain these customers as the 3 stage plan is implemented.
Other businesses have adapted and changed the products and services they provide to customers. In these circumstances consideration should be given to whether any resources need to be diverted to these new offerings.
Further COVID-19 Information
Franchising – The ACCC has released information for businesses during the COVID-19 pandemic, including information for franchisors and franchisees
The implementing of the Federal Government’s 3 Stage plan will not mark an immediate return to the “old normal”. Moving forward into such an uncertain world requires a detailed relaunch plan. …
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.