Obligations Under The Franchising Code of Conduct
To ensure compliance with obligations under the Franchising Code of Conduct (Code), franchisors and franchisees should be aware of the expectations imposed on them.
If either party fails to comply with any of their prescribed obligations, the ACCC has the power to bring court proceedings seeking financial penalties.
To avoid non-compliance, the following obligations should be noted by both parties.
Good faith
Both parties owe an obligation to their counterpart to act in good faith about the Code and the franchise agreement under which they are contracted. This obligation also applies to a person who proposes to become a party to a franchise agreement in respect of:
- any dealing or dispute relating to the proposed agreement;
- the negotiation of the proposed agreement; and
- the Code
Any clause to negative parties’ obligation to act in good faith is of no effect.
Disclosure Obligations
The Franchisor must create and update a compliant disclosure document. An update must occur within four (4) months after the end of the financial year. On request, the franchisor must update the document to reflect the position of the franchise at the end of the previous financial year.
A Franchisor must provide a prospective franchisee with a copy of the Code, disclosure document and franchise agreement at least 14 days before they agree, or their payment of a non-refundable amount. These documents must also be provided at least 14 days before the extension or renewal of the term/scope of the agreement.
Lease
If the franchisee leases premises from the franchisor or their associate, a copy of the lease or agreement to lease must be given to the franchisee. Details of any incentive or financial benefit the franchisee may be entitled to receive as a result of the lease or agreement to lease must be disclosed to the franchisee within one month after it is signed.
If no lease exists (absent the lease between the franchisor and the landlord), certain documents or information about the franchisor’s right to occupy, any associated conditions and details of any financial benefit or incentive to the franchisor, by virtue of the right to occupy, must be provided to the franchisee within one month after occupation commences. The name of the business providing that incentive should also be noted.
Other Agreements
If the franchisee or its staff are required to enter into another agreement, such as a lease or hire purchase agreement, agreement relating to intellectual property, security agreement (for example, a guarantee, mortgage, loan, etc.), confidentiality agreement or restraint agreement, a franchisor must give the franchisee a copy of that agreement within 14 days before the franchise agreement is signed, or as soon as it becomes available.
Financial Statements
If payment is required to be made to a marketing or co-operative fund, the franchisor must give the franchisee a copy of an audited and sufficiently detailed annual financial statement and, if required, an auditor’s report.
The statement must be prepared and audited within the four months after the end of each financial year and must be provided to the franchisee within 30 days of being made.
Materially relevant facts
If not already included in the disclosure document, other details relating to financials must be provided to the franchisee as soon as reasonably practicable, before they enter into a franchise agreement. Also, matters relating to:
- changes in majority ownership or control of the franchisor, their associate, the franchise system or material, intellectual property;
- certain court proceedings, judgments or arbitration awards; or
- the franchisor or their associate becoming externally administered
should be communicated in writing to a potential franchisee, within a reasonable time (not more than 14 days), once the franchisor becomes aware.
Notification Obligations
End of Term
If a franchisor intends to extend the franchise agreement or enter a new agreement, the franchisor must notify the franchisee in writing. If the term of the franchise agreement is six months or longer, notice must be given at least six months before the end of the term of the agreement. If the agreement is for a term less than six months, notice must be given at least one month before the end of the term of the agreement. The notice by the franchisor must state that the franchisee can request a disclosure document (once every 12 months) unless the franchisor does not intend to extend the agreement.
Termination
If the franchisee terminates an agreement within the seven-day cooling-off period, all payments made by the franchisee must be repaid by the franchisor within 14 days.
If it is proposed by the franchisor that the agreement be terminated due to breaches by the franchisee, the franchisor must give reasonable notice in writing. They must inform the franchisee of the action/s required to remedy the breach and then allow the franchisee a reasonable time (no more than 30 days) to effect the remedy.
If before an agreement’s expiration, a franchisor elects to terminate the agreement without breach by the franchisee or the franchisee’s consent to terminate, the franchisor must provide reasonable written notice of the proposed termination and provide reasons for it beforehand.
If you would like to know more about how we can help you draft, transfer, or terminate a franchise agreement or need assistance with other franchising-related matters, you can contact our office today on (07) 3036 0649.
