Changes to the Franchising Code Improving transparency in Australias franchising sector

What you need to know

• A new Franchise Disclosure Register will be launched in early 2022 to allow public access to key information about franchised businesses. Franchisors will have an ongoing obligation to publish the latest disclosure documentation on the Register.
• The Franchising Code was amended in June 2021 to include, amongst other things, additional pre-entry disclosure requirements, franchisee-friendly termination rights, higher threshold for restraint of trade provisions and prohibition on franchisors from passing on certain legal costs. 

What you need to do

• By 31 October 2022, all franchisors must create a profile for their franchise system and publish the latest disclosure documentation on the Franchise Disclosure Register. 
• If you are entering into, renewing or extending any franchise agreements on or after 1 July 2021, stay up to date with the new amendments to the Franchising Code of Conduct.

Franchise Disclosure Register to be launched in 2022

The 2021-22 Budget announced that the Federal Government will provide $4.3 million for the development of a new Franchise Disclosure Register. In September 2021, the Government released details of the proposed Register and invited interested parties to comment on the functionality of the Register's online portal, scope of disclosure, transitional arrangements and draft amendments to the Franchising Code in respect of the Register. 

The consultation process is now completed and it is anticipated that the Register will be launched in early 2022 to allow franchisors to voluntarily participate during the transitional period. All franchisors must meet their disclosure obligations by 31 October 2022.

Objectives of the Franchise Disclosure Register 

Information on the Register will be made available to the public without charge through an online portal. The purpose of the Register is to facilitate direct access to details about different franchise systems and to assist prospective franchisees to make an informed decision before entering into a franchise agreement.

Proposed features of the Franchise Disclosure Register 

Some of the key features of the proposed Register include:

• franchisors are required to create and maintain a profile for their franchise system on the Register;
• franchisors are also required to publish up-to-date disclosure documentation on the Register, with the exception of information that is personal, specific to individual franchisees and franchise sites, or related to rebates; 
• information uploaded by franchisors to the online portal will be automatically published on the Register and will not be checked, vetted or assessed for quality or completeness; and
• franchisors will be liable for a civil penalty of up to 600 penalty units (approximately $109,000) if they fail to comply with disclosure obligations in respect of the Register.

Other changes to the Franchising Code of Conduct 

On 1 June 2021, amendments were made to the Franchising Code of Conduct in response to the 2019 Fairness in Franchising report, which identified what was considered to be a substantial power disparity between franchisors and franchisees.  See our article in the July 2019 edition of IP @Ashurst (Franchisors in the firing line) where we discussed that report.

The latest changes to the Franchising Code aim to address that by improving fairness and transparency of the franchising sector, in line with the overarching goal of the Competition and Consumer Act 2010 to promote competition and fair trading. We have identified below some of the key changes to the Franchising Code of Conduct, many of which affect agreements entered into, renewed, or extended on or after 1 July 2021.

Additional pre-entry disclosure information 

On top of existing pre-entry disclosure obligations, franchisors are now required to provide additional disclosure information to prospective franchisees at least 14 days before the franchisee enters into a franchise agreement or make a non-refundable payment, including:

• a copy of the lease of the premises or a summary of the commercial terms of the lease;
• the percentage of franchisees in the franchise system that were a party to any alternative dispute resolution processes conducted in the previous financial year;
• details around rebates and other financial benefits that franchisors receive from suppliers; and
• the prospective franchisee's rights relating to any goodwill generated by the franchisee.

These additional pre-entry disclosure requirements apply to disclosure documents given to franchisees on or after 1 November 2021.

Restrictions on passing on legal costs 

Franchisors are no longer allowed to contractually pass on to the franchisee:

• the franchisor's legal costs beyond those relating to the preparation, negotiation and execution of the franchise agreement; and
• future legal costs which may arise but are unquantifiable at the time the agreement is signed.

Franchisors will be liable for a civil penalty of up to 300 penalty units (approximately $54,500) if they breach this prohibition.

More franchisee-friendly termination rights 

Provisions relating to the termination of franchise agreements have been amended such that:

• the cooling off period after entering into a franchise agreement has been extended from 7 days to 14 days; 
• a franchisee can propose an early termination of a franchise agreement and the franchisor must reply in writing within 28 days; and
• a franchisee can terminate the franchise agreement within 14 days after receiving the terms of the proposed lease, and a further 14-day cooling off period applies if the final terms of the lease are not substantially identical to the proposed terms.

Higher threshold for restraint of trade provisions

Restraint of trade provisions in a franchise agreement will now only be effective if a franchisee has committed a serious breach of the franchise agreement. This amendment aims to protect franchisees who have only breached the agreement in an insubstantial manner. 

Authors: Anita Cade, Partner; and Melissa Ho, Graduate.