Transitional arrangements

The New Code will apply to all franchise agreements entered into, transferred, renewed or extended on or after 1 April 2025, with several exceptions. Most importantly:

• Disclosure documents provided to prospective franchisees before 1 April 2025 do not need to be reissued before a franchise agreement is signed, so long as this occurs before 1 November 2025.
• The New Code form of disclosure document will need to be used from 1 April 2025, although several changes to that form in relation to significant capital expenditure and specific purpose funds do not need to be included until 1 November 2025.
• New requirements about return on investment and compensation to franchisees in some (limited) circumstances do not apply until 1 November 2025.

The current Code will continue to apply to franchise agreements in place before 1 April 2025, until they are transferred, renewed or extended.

Form of disclosure

The New Code disclosure document contains many form and numbering changes, but has few significant changes from the form required by the current Code.

The most important of these are that:

• Where a franchisor requires a franchisee to pay into a "special purpose fund" (previously a marketing or other cooperative fund) a copy of the most recently prepared annual financial statement for that fund must be attached the disclosure document.
• Although contact details of former franchisees who have left the system in the last three years are required to be included in the disclosure document, new restrictions apply before they can be included. These are described below.

Form of franchise agreement

Franchisors will need to make several changes to their form of franchise agreement to accommodate the New Code. The most important changes are summarised below.

Compensation and buy-back on withdrawal or restructure

The current Code contains highly unusual provisions applying only to new motor vehicle dealerships, requiring the franchisor to include provisions dealing with compensation if the agreement is terminated before it expires because the franchisor withdraws from the Australian market, rationalises its Australian network or changes its Australian distribution model. These provisions will apply from 1 November 2025 to all franchises, in a slightly different form. All franchise agreements from that date must include provisions dealing with such compensation, specifically referring to certain heads of loss or damage, whether or not the termination, change or withdrawal would be a breach of contract by the franchisor.

In addition, in these cases the franchisor will be required to buy-back the franchisee's stock and, unless they can be repurposed for a similar business, essential specialty equipment, branded product and merchandise.

The Exposure Draft had also applied each of the above requirements on non-renewal of a franchise agreement. Pleasingly, this was removed from the final version of the New Code.

Post-term restraint of trade

Post term restraints of trade must not be included in a franchise agreement if the franchisee was entitled to, but was not granted an extension or renewal of the franchise agreement, despite their request.

Operational changes

Franchisors will need to take note of a number of practical changes which will be required as a result of changes made in the New Code.

The most important of these is the new prohibition on entering into a franchise agreement unless it provides the franchisee with a reasonable opportunity to make a return on any investment the franchisor requires as part of entering into or under the franchise agreement. This will require careful documentation of what the franchisor does and does not require, and will likely require franchisors to be more actively involved in the sale of franchisee businesses. In the current Code, this requirement only applies to new motor vehicle dealerships.

Other changes include:

• As noted above, the current Code requires details of former franchisees who have left the system in the last three years to be included in the disclosure document, unless the former franchisee has requested they not be included. Instead of waiting to receive such a request, from 1 April 2025 franchisors will need to contact such former franchisees in writing telling them that their details will be included giving them 14 days' notice to object.
• Franchisors will be prohibited from providing their consent to a transfer until a proposed transferee has had a disclosure document for at least 14 days. This will complicate the transfer process, as the franchisor's consent is deemed to have been given after 42 days in some cases.
• The termination for breach provisions of the Code have been changed to make terminations more restrictive in some cases in which "immediate" or seven day termination had been permitted under the old Code. Franchisors will no longer be able to assume that their previous default notices and notices of termination can be used in the same way.
• Existing or recent franchisees are able to opt out of receiving additional disclosure documents and from its cooling-off right for additional franchises, in some cases.
• The restriction on charging document or legal costs to a franchisee for the issue of a franchise agreement has been tightened to make it more difficult for a franchisor to charge internal administrative or legal fees.
• Any monies paid by a prospective franchisee after they receive a disclosure document and before they sign a franchise agreement will be required to be returned on request.

Franchise disclosure register

The Register operating under the current Code will continue in the same form, for the time being. Annual updates will be required in the same timeframe as previously, being by the 14^th day of the fifth month following a franchisor's year end.

The Government is considering options for different forms of registration. We do not expect further news on this until early 2025.

Penalties

The current Code provides for financial penalties to apply for breach of some of the obligations under the Code. In most cases, the maximum penalty is currently 600 penalty units (worth AUD 198,000). Under the New Code, a penalty of up to 600 penalty units applies to all substantive obligations.

The changes do not impact the applicability of "super penalties" of AUD 10 million (or higher in some circumstances) which continue to apply to breach of obligations relating to disclosure of materially relevant facts, compensation for early termination and return on investment in the context of new vehicle dealership agreements, and restricting association of franchisees.