Franchise agreements – are yours in order?

All franchisors in Australia must ensure that they comply with the requirements of the Franchising Code of Conduct (the Code).  This including ensuring that their franchise agreements are compliant and up to date with all legislative requirements.

As a franchisor, you should ensure that the following sections are contained in your franchise agreements:

1. Cooling-off period

Under the Code, each franchisee must have seven days cooling-off period after signing the franchise agreement.  If the franchisee cools off in that time, the franchisor must repay all amounts paid to them by the franchisee, but is entitled to cover the franchisor’s reasonable expenses.

The franchisor should be able to claim real and reasonable costs, including but not limited to:

  • legal costs incurred in drafting the franchise documents;
  • costs of training; and
  • administrative costs in recruiting the franchisee.

It is recommended that a franchise agreement contains a pre-determined and set retention amount, being the amount the franchisor can retain upon the franchisee exercising their right to cool off.

2. Marketing fund information

If the franchisor collects any amounts from franchisees as a marketing or advertising fee, the franchisor must comply with its obligations under the Code related to the marketing fund.

Therefore, the franchise agreement must state whether any marketing fees are charged, and if so, the amount charged (usually a percentage of gross revenue) and when it is payable.

The franchise agreement must also outline the details of the marketing fund, its operation, the expenses the marketing fund can be used for, how and if it will be audited and any other information relevant to the marketing fund.

Franchisors will also need to provide franchisees with the financial statements of the marketing fund annually, within  four months of the end of each financial year.  At the same time, an audit report of the marketing fund should be provided, unless more than 75 per cent of the franchisees resolved not to audit the fund.

3. Transfer of the franchisee’s business

The Code dictates that a franchise agreement must specify how a franchisee can transfer their business to a third party and what information will be reasonably required to be provided by a franchisee.

A franchisor cannot unreasonably withhold consent to a transfer of a franchise.  However, section 25 of the Code specifies circumstances in which the franchisor can withhold consent, which include but are not limited to:

(a)  the proposed transferee is unlikely to be able to meet the financial obligations that the proposed transferee would have under the franchise agreement;

(b)  the proposed transferee does not meet a reasonable requirement of the franchise agreement for the transfer of the franchise agreement;

(c)  the proposed transferee does not meet the selection criteria of the franchisor;

(d)  the proposed transferee does not agree, in writing, to comply with the obligations of the franchisee under the franchise agreement;

(e)  the franchisee has not paid or made reasonable provision to pay an amount owing to the franchisor;

(f)  the franchisee has not remedied a breach of the franchise agreement; or

(g)  the franchisor has not received from the proposed transferee a written statement that the transferee has received, read and had a reasonable opportunity to understand the disclosure document and this code.

4. Termination of franchise agreement

Termination of a franchise agreement is covered by Division 5 of the Code.  It lists circumstances, in which a franchise agreement can be terminated and the process to be followed.

The franchise agreement cannot override any provisions of the Code, which includes termination provisions.  Further, a compliant franchise agreement should specify all grounds of termination as per the provisions of the Code.

Apart from the cooling off provision allowing termination of the franchise agreement by a franchisee within 7seven days of signing such agreement, there are two other categories of events, when the franchisor can terminate the franchise agreement.

The first is termination for breach and the second is special circumstances when the franchise agreement can be immediately terminated.

Special circumstances which allow for immediate termination by the franchisor include when a franchisee:

(a)  no longer holds a licence that the franchisee must hold to carry on the franchised business; or

(b)  becomes bankrupt, insolvent under administration or a Chapter 5 body corporate; or

(c)  in the case of a franchisee that is a company—become deregistered by the Australian Securities and Investments Commission; or

(d)  voluntarily abandons the franchised business or the franchise relationship; or

(e)  is convicted of a serious offence; or

(f)  operates the franchised business in a way that endangers public health or safety; or

(g)  acts fraudulently in connection with the operation of the franchised business.

In all other circumstances, the franchisor must:

  1. give to the franchisee reasonable notice, in writing, that the franchisor proposes to terminate the franchise agreement because of the breach;
  2. tell the franchisee what is required to be done to remedy the breach; and
  3. allow the franchisee a reasonable time to remedy the breach.

Termination can also occur if both the franchisor and the franchisee agree to terminate the franchise agreement at the time of termination.  This cannot be pre-determined years in advance.

Franchisors should review their franchise agreements at least annually to ensure they are compliant with all current legislation.