As most people in the franchising sector will no doubt be aware, the Franchising Code of Conduct has recently been overhauled in an effort to correct some of the perceived imbalances in the relationship between franchisors and franchisees. After much review, debate and consideration the new Code took effect on 1 January 2015.
It is incumbent on franchisors to be across the changes to the Code and implement those changes into their franchise documentation and the operation of their businesses.
Perhaps now more than ever, franchisors should ensure that they are informed of their obligations under the new Code and this article sets out to highlight the top five things a franchisor can do to be Code compliant.
1. Issue current disclosure document
While franchisors are provided with a transition period of until 31 October 2015 to update their disclosure documents to reflect the new Code, most participants in the sector are seeing the value in taking a proactive approach to the amendments and plan to update their franchise documents sooner rather than later. The new Code requires additional disclosure relating to online sales, territory or site history, capital expenditure, and materially relevant changes to the network among other new disclosure requirements.
2. Issue information statement
Franchisors must now issue information statements to all prospective franchisees as soon as practicable after they formally apply or express an interest in buying a franchise. The information statement must be in the form specified by the Code including font size and page length. The purpose of the information statement is to highlight the risks and rewards of franchising.
3. Act in good faith
While the concept of good faith is not new in franchising, the new Code stipulates that both franchisors and franchisees must act in good faith in their dealings with each other. In simple terms, this means that the parties must act reasonably, honestly and not exercise their powers arbitrarily or for an ulterior motive. This obligation extends to all aspects of the franchising relationship including pre-contractual negotiations, during the term of the agreement, dispute resolution and at the end of the agreement.
4. Keep a separate bank account for marketing fund contributions
If a franchisor operates a marketing fund as part of its system, it must now hold all marketing fund contributions in a separate bank account. Franchisors may now need to act quickly to ensure that the marketing fund bank account is set up and all direct debit forms (if applicable) are in place before 1 January 2015.
Additionally, any corporate owned stores must now also contribute to the marketing fund at the same rate as franchisees.
5. Disclose fit-out contributions and lease incentives
In premises based franchise systems, franchisors must now disclose to its franchisees any fit-out contributions or lease incentives it receives from the landlord in respect to the lease. In addition to a copy of the lease and any occupancy deed, franchisors must now provide to its franchisees the details of any lease incentives including the name of the business providing the incentive or financial benefit.
Why franchisors must comply
Non-compliance with the Code may expose franchisors to enforcement action by the Australian Competition and Consumer Commission. Infringement notices with penalties of up to $8,500 may be issued to body corporates and the ACCC can apply to the courts for pecuniary fines of up to $51,000 for each serious breach of the Code.
The changes to the Code are the most significant since its inception in 1998. Now that the new Code has been released, it is prudent that franchisors seek legal advice as to what they need to do to ensure that their franchise documentation and businesses are Code compliant.