Franchisees across the network are challenging the franchisor against alleged renewals conditional on renovation requirements.
Nando’s, a chicken chain, is fighting with franchisees over whether it has the authority to compel them to renovate their stores. According to a report by Fairfax Media, the matter is being fought in the Supreme Court.
Current and former franchisees claim that head office is trying to compel them to pay for renovations; if they don't want to pay, the company declines to renew their franchise agreement, forcing them to close.
Franchisees have reported to have been quoted renovation costs between $150,000 and $1 million.
Is the franchisor acting legally?
“It has traditionally been very common for there to be clauses in franchise agreements which require franchisees to renovate or update or bring the premises up to current standards when and how the franchisor requires, and also as a condition to the renewal of the franchise agreement,” said Raynia Theodore, principal at MST Lawyers
However, the changes to the Franchising Code of Conduct (The Code), which came into effect in January 2016, means that a franchisor cannot require a franchisee undertake significant capital expenditure during the term of a franchise agreement.
But there are exclusions:
expenditure that was disclosed in the disclosure document given to the franchisee before the franchisee entered into, renewed or extended the term or scope of the franchise agreement is excluded.
expenditure that the franchisor considers is necessary as capital investment in the franchised business, justified by a written statement given to each affected franchisee which states, the rationale for making the investment, the amount of expenditure required, the anticipated outcomes and benefits, and the expected risks associated with making the investment.
Theodore said the change affects all franchise agreements entered into after 1 October 1998.
As for the renewal process, there is no restriction under the Code on the conditions the Franchisor can impose on renewal of the franchise agreement, as these would need to be specified in the original agreement document.
However, Theodore said for franchise agreements entered into after 12 November 2016, in certain circumstances, it is possible courts that may deem such clauses to be unfair under the new unfair contract terms laws.
A clause will potentially be unfair under the new laws if:
the franchise agreement is deemed to be a standard form contract;
one party to the agreement had less than 20 employees at the time the franchise agreement was entered into;
the clause creates an imbalance between the parties; and
one party will suffer a detriment which is not reasonably necessary to protect a legitimate interest of the franchisor.