Robert and Kristen attended the Franchise Council of Australia Legal Symposium in sunny Brisbane (as opposed to miserable Melbourne!) on Sunday 16 October. As always, it provided valuable updates and insights into the franchise sector from others in the legal sector and the ACCC.

Our top 10 takeaways are as follows:

1. The ACCC

The ACCC confirmed it will continue to monitor franchise compliance by franchisors noting they acted against 13 Franchise systems over the last 12 months from which huge fines and penalties were imposed against non-compliant franchisors and their directors. This sheets home that compliance with the Code is even more critical and franchisors who think they may be able to skirt around compliance take on huge risk.

2. Unfair Contract Terms

The ACCC supports (yet to be made law) financial penalties for franchisors and businesses who include unfair contract terms in their agreements. To date, they only have the power to seek removal of the unfair provisions but no ability to impose fines or penalties.

3. Franchise Disclosure Register – 14 November 2022 deadline

All franchisors must now register their system on the Franchise Register which will become public the following day. It is not optional!

This can take considerable time to enter all information required on the Register, so franchisors need to get online now and not leave it to the last day. Things to note:

• Master franchisors who have only appointed one sub franchisor in Australia, are not required to register; and
• International franchisors who directly franchise in Australia or who have more than one sub franchisor in Australia are also required to register.

If you need assistance, please contact our office. A failure to register exposes the company to significant fines and penalties!

4. Marketing Fund Statements

Marketing Fund Statements must, as per the ACCC guidelines, show sufficient detail to enable an ordinary reader (not just an account professional) to understand them. They must contain enough detail to give franchisees meaningful information about the marketing fund’s income and expenses. It should not just be a vanilla P &L with little detail.

5. Breach Notices

At the Symposium, the panel discussed the need and strategy behind issuing a breach notice to franchisees. That is, you should consider your “end game” such as:

• Do you intend to follow through with the breach notice (and terminate the franchise)?
• Is it a material breach or just an operational one?
• How will it look to other franchisees in the system if you issue notices but then don’t act on them?
• What are the practicalities if you do intend to terminate?

Franchisors should seek their lawyer’s advice before internally issuing a breach notice after considering the above. Consider the issue of show cause notices to franchisees for minor breaches rather than formal breach notices to keep them in line.

6. PPSR Security Interests

With the current economic climate pressures on small businesses, franchisors should ensure they have the right to register a PPSR security interest over the franchisees business and assets. This is particularly important if the franchise fails, so franchisors can have priority over unsecured creditors if the franchisee ends up in voluntary administration, receivership, or liquidation.

7. Selling a Franchise System

A franchisor considering a sale of their system should get ready to sell and undertake a detailed review of their system at least 12 months before going on the market to have the best chance of a smooth transaction and efficiently respond to a purchaser’s due diligence process.

A franchisor should start from the basics to ensure all agreements are current and executed, all other material documents are current and readily available, and to allow for assignment or transfer as well as all employee entitlements having been paid.

8. Lease Options and Rent Review Rights

All states (excluding WA) have provisions in their Retail Leases Act which allows an early determination of market rent before a tenant exercises their option. This means a tenant can negotiate their rent under their lease before the option notice period.

Whether the franchisor or franchisee holds the lease, diarise the date they can exercise this right so they are ready to approach the Landlord when the time comes.

9. Data Sharing, Ransomware and Cyber Security

Franchisors need to ensure as part of their operations and policies, and their software, that they have in place the latest security measures to prevent random cyber-attacks. This includes training for franchisees in relation to cyber security.

Companies can be heavily fined for breaches of privacy, and we have seen some high-profile ones recently with Optus and Medibank.

A breach becomes public very quickly and can have a huge negative impact on the brand and reputation of the business, as well as placing the franchise network at risk. As most franchisees are not subject to the data protection laws, the responsibility falls legally on the franchisor.

10. Territories and Online Sales

This area continues to cause issues and friction between franchisors and franchisees where the franchisor controls online sales which may take revenue away from a retail franchisee.

We find it is all about transparency or in some cases, the lack thereof. Franchisors need to be clear if they will share the revenue from online sales with their franchisees. Franchisors need to bear in mind their obligations to act in good faith, and any unilateral terms and conditions in their franchise agreements that may be considered unfair contract terms.

Key Takeaways for the Franchise Sector for 2023

• For franchisors, there is greater compliance with the Code which means greater cost (internal and external).
• Franchisors need to be giving even more support and attention to their franchisees including their financial and mental health, something franchisors did not previously want to do! The days of being a “hands off” franchisor is gone!
• For Franchisees, getting the right advice from a specialist franchise lawyer and undertaking independent financial analysis is vital to making an informed decision, particularly as there are so many franchise systems on offer.
• Register NOW if you are a franchisor on the ACCC site!

We have over 35 years’ experience supporting franchisors with establish and support their franchise system, Master Franchise rights, acting for overseas franchisors, advising franchisees, and resolving franchise disputes.

If you would like further information on franchising, contact Robert Toth ([email protected]) or Kristen Attard ([email protected]) or call us on (03) 9510 9888.