Timeframes in Franchising



Timeframes in Franchising

Australia’s franchising industry is arguably the most heavily regulated in the world.

Timeframes are critical in franchising transactions. Some of the key timeframes under the Franchising Code of Conduct (Code) are as follows:

1. Franchisees have a 7 day cooling-off period after entering into a Franchise Agreement or making a non-refundable payment to the franchisor (except on renewals, variations or transfers of existing businesses). This means that franchisees who have a last-minute change of mind or who can’t secure finance can pull out of the deal. It does carry a penalty, with the franchisee being required to compensate the franchisor for a portion of the franchisor’s reasonable costs.

2. All prospective franchisees must be given a current Disclosure Document with a copy of the proposed Franchise Agreement and the Code at least 14 days before entering into a Franchise Agreement. This gives them time to do their due diligence and their own investigations into whether the franchise is the right choice for them.

3. Franchisors must update their Disclosure Document annually within 4 months of the end of the franchisor’s financial year (with some exceptions under the Code). Therefore, most franchisors operating on a standard Australian July-to-June financial year must complete their update by 31 October each year. A Disclosure Document must contain a statement confirming the franchisor’s solvency, along with the franchisor’s financial statements for the previous 2 financial years or an independent audit report of those statements. There are alternative obligations if the franchisor is new and hasn’t existed for that length of time.

4. If a franchisor operates a marketing or advertising fund, the fund must also be audited within the same timeframe to update the Disclosure Document unless 75% of the franchisees who contribute to the fund vote otherwise. This will be an audit of the fund’s receipts and expenses for that financial year. The audited statement and audit report must be provided to franchisees within 30 days of its preparation.

5. A franchisee has the right to request a copy of the franchisor’s then-current Disclosure Document once every 12 months. The franchisor must provide this within 14 days. If the franchisor has relied on one of the exemptions under the Code and hasn’t updated their Disclosure Document that year, the franchisor then has 2 months to update the Disclosure Document and provide it to the franchisee.

6. A franchisor must notify their entire franchise network within 14 days of a ‘materially relevant’ fact occurring. Some of these things include:

a. Investigations by a public agency (e.g. ASIC) or judgments against the franchisor.

b. Legal proceedings instituted against the franchisor by at least 10% or 10 franchisees (whichever is lower).

c. Change of ownership or control of the franchisor, their intellectual property or the franchise system.

d. The franchisor becoming externally administered.

7. If a franchisee wants to sell their business, they need the franchisor’s consent. The franchisee must provide the franchisor all the information the franchisor reasonably requires to consider the sale. The franchisor then has 42 days to advise whether or not they consent to the sale. Once the franchisor gives consent they then have 14 days to withdraw it, but they must have a reasonable basis for doing so.

8. A franchisor can terminate a Franchise Agreement if the franchisor gives the franchisee a written breach notice and the franchisee doesn’t remedy the breach accordingly. If the franchisee remedies the breach, the franchisor cannot rely on that breach to terminate the Franchise Agreement. The breach notice must:

a. set out the obligation which has been breached;

b. set out what is required to remedy the breach;

c. provide a reasonable time to remedy the breach (which doesn’t need to be more than 30 days); and

d. state that the franchisor proposes to terminate the Franchise Agreement if the breach isn’t remedied.

9. There are also certain circumstances which entitle a franchisor to immediately terminate a Franchise Agreement without first giving the franchisee the opportunity to remedy the breach. These are if the franchisee:

a. no longer holds a licence which they must hold to carry on the business;

b. becomes bankrupt or insolvent;

c. if a company, becomes deregistered by ASIC;

d. voluntarily abandons the business or the franchise relationship;

e. is convicted of a serious offence;

f. operates the business in a way that endangers public health or safety; or

g. acts fraudulently in connection with the operation of the business.

Takeaways

Breaches of some provisions of the Code can result in ACCC infringement notices. These are currently $11,100 per breach for companies and $2,200 for individuals involved in the conduct (such as a company director). Court issued penalties for breaches of the Code are currently up to $66,600 in each instance. Multiple breaches can mean multiple infringement notices and penalties.

Compliance with the Code’s timeframes must therefore be taken seriously.

The team at Salerno Law are experienced in acting for both franchisors and franchisees in all aspects of franchising law. Get in contact if you need our assistance.

At the time of writing this article, the Franchising Code of Conduct is currently under review by the federal government. Many changes are expected to be made. We will be publishing further updates about these changes once they are announced.

By Luke McKavanagh

Luke has specialised in franchising law since his admission into practice and has acted for a diverse range of franchisors and franchisees of a variety of franchise systems. He is also an active member of the Queensland Law Society Franchising Law Committee where he keeps on the forefront of the latest developments in laws affecting franchising, and contributes towards submissions to government on topical issues facing the franchising industry.