On 9 October 2024, the Australian Federal government (Government) released the highly anticipated exposure draft, which proposes a substantial rewrite of the Competition and Consumer (Industry Code – Franchising) Regulations 2024 (Code).
The new Code will be effective from 1 April 2025 and aims to embody the recommendations arising from Dr Michael Schaper’s independent review, published late last year.
The Government provided a very short window for consultation, which has now closed. Any submissions on the proposed draft laws were to be submitted by no later than Tuesday, 29 October 2024.
What are the key changes?
- Reasonable opportunity to make a return on investment
Arguably the most contentious element of the new Code is the obligation proposed on franchisors to provide franchisees with a “reasonable opportunity to make a return on investment”.
Previously limited to new motor vehicle dealership agreements, the new Code intends to apply this obligation across all franchise agreements and allow franchisees the opportunity for a return on investment during the term of the agreement, in relation to any investment required by the franchisor as part of entering into the agreement.
According to the Explanatory Statement, which accompanies the new Code, what is considered a reasonable opportunity will be specific to the terms of each agreement, the costs paid by the franchisee and the length of the agreement.
- Extension of early termination rights
The new Code also proposes significant changes to early termination rights. All franchise agreements must include the right to early termination of the agreement under specific circumstances, such as when the franchisor:
- withdraws from the Australian market; or
- rationalised its networks in Australia; or
- changes its distribution models in Australia.
Further, the franchise agreement should specify the method of compensation for early termination, which should consider the following factors:
- lost profits from direct and indirect revenue;
- unamortised capital expenditure requested by the franchisor;
- loss of opportunity in selling established goodwill;
- costs of winding up the franchised business.
The franchise agreement must also contain provisions which require the franchisor to buy back or compensate the franchisee for all outstanding stock, specialty equipment, branded product or merchandise or any other thing that the franchisee was required to purchase or maintain for the purposes of the franchise.
- Removal of Key Facts Sheet
Currently, a Key Facts Sheet must be provided to a prospective franchisee at least 14 days before the franchisee enters into a franchise agreement or pays non-refundable money to the franchisor.
However, the new Code removes this requirement entirely. The Explanatory Statement outlines the intent of the removal of the Key Facts Sheet, which is to improve readability by removing repeated information and merging all requirements into the Disclosure Document.
Below is a summary of further changes introduced in the new Code. However, this is not an exhaustive list of all changes set to commence on 1 April 2025.
- Franchisees can now opt out of receiving disclosure documents from the franchisor if the franchise agreement is the same or substantially the same as the existing agreement. This op-out has to be in writing.
- Introduction of a new term, ‘specific purpose funds’, which refers to any payment arrangement where the franchisor requires the collection of money from franchisees for a specific common purpose. This new term will apply instead of Marketing or Advertising fund.
- Franchisors are provided an easier pathway to termination where a franchisee is in serious breach of the franchise agreement. On certain grounds, franchisors are permitted to terminate the franchise agreement with 7 days written notice and without needing to follow the Alternative Dispute Resolution (ADR) process.
- The Australian Small Business and Family Enterprise Ombudsman is empowered to publicly name franchisors who fail to participate meaningfully in the ADR process.
- The scope of penalties and infringement notices, along with investigation powers, are increased under the new Code.
As mentioned above, the period for providing feedback on the new Code has now ended. It is hoped that the submissions will effectively enhance the clarity and quality of the proposed draft. Should you have any concerns about the draft legislation or its potential impact, please don’t hesitate to contact our team.