Key takeaways

Recommendations from the Review which are reflected in the Exposure Draft include:

• Removal of the obligation to give a separate key facts sheet to prospective franchisees
• Obligations on all franchisors to assess upfront if the franchisee will be provided with a "reasonable opportunity to make a return"
• Obligations on all franchise agreements to include provisions relating to compensation for the franchisee if the franchisor terminates the franchise agreement early because it withdraws from or rationalises its networks in Australia or changes its distribution models
• Obligations for all franchise agreements to include provisions relating to compensation or buy back of stock, essential or branded equipment or goods and other things the franchisor required the franchisee to maintain, if the franchise agreement was not renewed
• Relaxation of some disclosure obligations for certain current or recent franchisees
• Changes to termination provisions which permit franchisors to terminate with seven days notice on certain grounds which a franchisee cannot dispute (i.e., bankruptcy, wage theft, conviction of a serious offence)
• Addition of civil penalties to all substantive obligations under the Code

The most notable omission from the Exposure Draft is the possible introduction of a franchise licensing system. This was raised as a possibility by the Review, but was recommended for further analysis.

Issues of concern

As the government had announced that it accepted all of 23 recommendations of the Review, most of the changes reflected in the Exposure Draft were expected. However, some of the draft changes to the Code go beyond the Review recommendations and will create new problems for franchisors. It is to be hoped that these issues can be addressed as part of the consultation process. They include:

• In attempting to broaden the cases in which a franchisor may terminate on only seven days' notice, the drafting has the effect of removing a franchisor's ability to terminate on reasonable notice (which need not be more than 30 days) if the conduct complained of falls under one of the 7-day termination heads. This is not the case in the current Code and it was not discussed or recommended in the Review.
• Disclosure documents will need to attach a copy of the most recent financial statements of any marketing or other cooperative fund. These can include a significant amount of confidential detail. The current Code only requires that the disclosure document include the fund's expenses in its last financial year including the percentage spent on production, marketing, administration and other stated expenses. This was not discussed or recommended in the Review.
• The new provisions relating to compensation or buy-back were stated to be an extension to all franchisors of those which currently apply only to certain motor vehicle dealers. However, they go beyond this. The current motor vehicle buy-back provisions relate to only vehicles, spare parts and special tools, but the Exposure Draft provisions that apply to all franchisors extend to specialty equipment, branded product or merchandise that could not be repurposed for a similar business, all the outstanding stock of the franchised business that had been specified by the franchisor and any other "thing" the franchisor required the franchisee to purchase or maintain.

The Exposure Draft in detail

The key changes to the Code which are proposed under the Exposure Draft are set out below:

• Definition of motor vehicle dealership: In line with Recommendation 4 of the Review, the definition of ‘motor vehicle dealership’ has been amended to explicitly capture the servicing or repairing of motor vehicles conducted by dealers which buy, sell, exchange or lease motor vehicles. This will ensure that vehicle servicing and repair franchises that do not buy, sell, exchange or lease vehicles will not be subject to additional onerous requirements under the Code.
• Statutory review: In line with Recommendation 5 of the Review, the Exposure Draft provides that the Code must be reviewed every five years to ensure it is operating efficiently and effectively. The Exposure Draft further provides that the next review must occur before 1 April 2030.
• Removal of key facts sheet: As part of an effort to streamline the pre-entry information to be provided to prospective franchisees (and as set out under Recommendation 6 of the Review), the Exposure Draft proposes to remove the obligation on franchisors to provide a key facts sheet to prospective franchisees (given the information in that document is already included on the Franchise Disclosure Register).
• Opt-out provisions: In a further effort to streamline the Code in line with Recommendation 6 of the Review, the Exposure Draft provides that existing franchisees may opt-out of receiving disclosure documents, and can also opt-out of the previously mandatory 14-day cooling off period (if they choose to do so).
• Termination for serious breach: In line with Recommendation 13 of the Review, provisions regarding termination for breach have been revisited to better assist franchisors to take action to address serious misconduct. On this basis, under the Exposure Draft franchisors may terminate with seven days’ notice to franchisees where there has been a finding against a franchisee by a competent authority in respect of serious misconduct, in which case no alternative dispute resolution procedures would be required. Alternatively, franchisors can still terminate for other grounds subject to undergoing an alternative dispute resolution process.
• Return on investment: In line with Recommendation 8, the Exposure Draft provides for the expansion of the requirement that new vehicle dealership agreements must provide a reasonable opportunity to make a return on investment to all franchise agreements. There is however no clarity provided regarding the meaning of ‘reasonable opportunity’ (which is likely to vary depending on the costs paid and investments made by the franchisee and the duration of the franchise agreement). This amendment is particularly problematic, as these provisions are untested and it is unclear to what extent external factors will impact what is considered a ‘reasonable’ return. They may also impact a franchisor's ability to consent to the sale of a franchise, as they would need to be clear that the buyer did not over-invest. The government has stated, however, that there is no expectation that franchisors ‘guarantee’ the profit or success of the business.
• Compensation for early termination or non-renewal: In line with Recommendation 9 of the Review, the Exposure Draft provides for the expansion of the requirement that new vehicle dealership agreements must include provisions in franchise agreements for compensation for franchisees in the event of early termination because the franchisor withdraws from or rationalises its networks in Australia or changes its distribution models. Franchisors will also be required to specify how they will purchase or compensate for outstanding stock of the franchise which is required to operate the franchise in that event, and also if the franchise agreement is not renewed.
• Restraints of trade: The Exposure Draft provides that, instead of simply being of no effect which is the current position under the Code, certain post-termination restraints on franchisees are prohibited. This is in line with Recommendation 15 of the Review that further work should be done to limit the use of unreasonable restraints for trade in franchise agreements. Franchisors will likely need to amend the restraint of trade provisions in their franchise agreements in order to comply with this requirement.
• Penalty provisions: In line with Recommendation 22 of the Review, under the Exposure Draft penalty provisions will now apply to all substantive obligations under the Code. The penalty amount is set at 600 penalty units (which is currently AUD 198,800).

Licensing regime not imminent

The Review recommended that the government should investigate the feasibility of introducing a licensing regime for franchisors as a prerequisite to operating a franchise system in Australia, but that a comprehensive analysis is needed to understand the nature, extent and implications of such a fundamental shift. It is unclear whether the government has yet considered the feasibility of such a system in any detail, but as of the date of this Exposure Draft no such system has been proposed. This is consistent with government comments regarding the potential benefits and drawbacks of such a licensing model, but it is too early to tell if licensing is off the table.

Next steps

We expect the Exposure Draft to be finalised shortly after submissions close on 29 October 2024, so that it can be tabled in Parliament later this year and enacted before the current Code is due to sunset on 1 April 2025.