COVID-19 and Franchising

COVID-19 and Franchising

We have set out below some of the most common questions we are being asked by franchisors and franchisees during the COVID-19 pandemic.

 

 

Contents

Does a franchisee need to pay fees?

Can A Franchisor Terminate the Agreement?

What does good faith mean?

Operating my franchise during COVID-19

 

 

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, there have been no legislative amendments requiring franchisors to waive, reduce or defer franchise fees during the COVID-19 pandemic.

 

 

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. 

 

 

 

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

• Honesty
• Fairness
• Not acting arbitrarily
• Co-operating to achieve the purpose of the franchise agreement
• Reasonableness
• 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?

 

Operating my franchise during COVID-19

 

–Know the current state of your 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 .

Before any decision is made on whether to cease operation of your business, you will need to consider the terms of any franchise agreement under which the business is operated.

 

–Assess your supply chain

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.

 

–Assess consumer demand

Some businesses have attracted customers during the COVID-19 restriction period that they would not otherwise have attracted. 

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.

 

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.