Federal government unveils franchise reforms: Here are eight changes SMEs need to know

Reforms designed to better balance the rights of franchisees and franchisors in the $154 billion franchising industry will come into effect next month.

The amendments to the Franchising Code of Conduct, the mandatory code that regulates conduct between franchising parties, feature eight major changes, including an improved dispute resolution process.

Small business minister Stuart Robert announced the changes on Tuesday, with many to come into effect on July 1, 2021.

However, amendments related to dispute resolution will apply to disputes from June 2, and amendments that require franchisors to change disclosure documents will apply from November 1, 2021. 

The reforms come after a string of high-profile franchising scandals, and an extensive period of consultation on proposed changes to the code, including consultation on exposure draft legislation in late 2020. 

Acknowledging the reforms, Australian Small Business and Family Enterprise Ombudsman Bruce Billson said the updated code will help streamline disputes and give franchisees access to transparent information about their franchise expenses.

“The changes to the code mean prospective and current franchisees will be better armed with vital information needed to run their business,” Billson said.

Here are eight key changes SMEs need to know about.

1. Dispute resolution 

Under the new changes, the code will allows the Small Business Ombudsman to appoint a mediation, conciliation or arbitration adviser to help resolve disputes between single or multiple franchisees and their franchisor.

The Ombudsman has also been given greater powers to appoint an independent arbitrator, when both parties agree, which will help franchisees resolve disputes through a more cost-effective process.

2. Disclosure requirements for franchisors  

Under the updated code, franchisors must meet additional requirements when providing documents to their franchisees prior to striking an agreement. This includes franchise agreements and disclosure statements.

Franchisors must give prospective franchisees an information statement before other disclosure documents, while a key facts sheet must be provided — along with other disclosure documents — at least 14 days before a prospective franchisees enters a franchise agreement or pays non-refundable money. 

Franchisors must also update this statement of facts for ongoing franchisees after the end of each financial year to ensure the document is accurate. 

3. Exiting an agreement 

There are several new measures in the code that will make it easier for franchisees to terminate new and existing agreements.

For example, franchisees now have 14 days to terminate a new agreement after it’s made. They can also terminate a new agreement 14 days after receiving a proposed lease, as well as 14 days after entering into a lease, if they were not provided with accurate lease documents beforehand. 

Existing franchisees wanting to exit an agreement can now give their franchisor a written proposal for termination at any time, and the franchisor must respond within 28 days.

4. Expenses franchisees are required to pay

Capital expenditure rules, which relate to the ongoing expenses franchisees must pay, have also been updated.

Generally, a franchisor must not require a franchisee to undertake ‘significant capital expenditure’ in relation to a franchised business during the term of an agreement.

However, significant capital expenditure can include any expense outlined in the disclosure document that a franchisee has agreed to. 

There are more requirements for franchisors to explain the types of expenses franchisees are liable to pay in the disclosure document.

Requirements have also been tightened for marketing funds, or accounts controlled by the franchisor that franchisees pay money into.

The franchisor is now required to prepare an annual financial statement that includes detailed information about the sources of the fund and what the fund was spent on. Failure to provide adequate statements can result in a fine. 

Franchisors are also restricted to only use the funds to cover expenses outlined in the disclosure document, and the expenses must be related to marketing costs. 

5. Changes to franchise agreements

Under the franchise reforms, there are two new rules relating to franchise agreements that are designed to better protect franchisees from unfair conduct. The updated code prevents franchisors from drafting franchise agreements that force franchisees to cover all of the franchisor’s legal costs. 

Franchisors also cannot make retrospective changes to a franchise agreement, unless the franchisee has given written consent to the variation.

6. Leasing of premises 

Some of the rules around franchisees leasing or subleasing premises from their franchisor have changed.

There are now more circumstances where franchisors must give accurate copies of the lease to their franchisees, and failure to do so can result in a fine.

7. Restraint of trade clauses

In franchise agreements, restraint of trade clauses exist to stop a franchisee from competing with the franchisor, usually after the franchise agreement ends.

Under the reforms, a restraint of trade clause has no effect after the agreement ends, if just before the expiry, the franchisee was not in serious breach of the agreement.

8. New vehicle dealership agreements

Franchisees entering into new vehicle dealership agreements will also be better protected from unfair conduct through changes to end of term obligations, capital expenditure rules and access to improved dispute resolution.

The Australian Competition and Consumer Commission said on Tuesday it will publish further information about the changes on its website soon.