Franchisor Guide – End of Term Notice Obligations

Franchisors have numerous obligations under the Franchising Code of Conduct (‘The Code’) and a failure to comply with them can risk fines and penalties under The Code by the ACCC. Here are key issues for Franchisors to be aware of to avoid compliance risk.

Clause 18 of the Franchising Code requires franchisors to give written notice at least 6 months prior to the end of the franchise term to franchisees as to whether the franchisor will agree to:

• Extend the existing franchise agreement, or
• Renew the agreement, that is, enter into a further term.

The notice must also include a statement informing the franchisee of their right to request a disclosure document. Failure to comply or omitting the statement exposes franchisors to potential civil penalties, with the maximum penalty currently being $187,800 per breach.

Steps to take:

• Prepare a Schedule of all franchise agreements and ensure they have been properly executed and dated and that there is a commencement date in the agreement.
• Diarise the date that is not less than 6 months before the expiry date of all your franchise agreements.
• We suggest that you send the Notice at least one month before that last date with a record that the franchisee has received the notice.
• Check that under the agreement, you are permitted to serve notice via email or by post.

Franchisees are not automatically entitled to a further term after their initial term has ended as it depends on the terms of their franchise agreement. Even if the agreement gives the franchisee a right to a further term, there may be conditions attached to it, such as upgrades to the site or branding, paying a renewal fee or entering into the latest version franchise agreement with different terms. Where the franchisor and franchisee agree to continue on a month-to-month, or ‘holding over’ basis to extend the agreement beyond its initial term (for example the parties are negotiating terms of the renewal or a new agreement) the franchisor must still give the end of term notice and provide disclosure.

If a franchisee is renewing or extending their agreement, the franchisor must give them the renewed documents as they give to new franchisees, at least 14 days before the franchise agreement is renewed or extended. The new agreement may contain different terms to that originally entered into as the franchise system may have changed.

Clause 15(1)(b) of The Code requires Franchisors to prepare financial statements for their marketing funds by 31 October each year and which must contain “meaningful information” regarding the income and expenditure of the fund.

The Ultra Tune case highlighted that simply providing a broad description of marketing activities is inadequate and “meaningful” information must include specific details regarding how the funds were expended and the purpose of the expenditure so saying $10,000 for TV adverts is not adequate and should include where, the purpose of the advertising and name of the campaign dates and duration of the campaign.

A breach here exposes franchisors to potential civil penalties, with the maximum penalty currently being $187,800 per breach.

Steps to take:

• Ensure your marketing report is set up with your financial department to provide that detail and is approved by your lawyers to be compliant in order to avoid risk.
• Keep records of all receipts and expenditure for audit purposes if ever questioned by a franchisee or the ACCC.

The Code gives franchisees, including renewing franchisees and purchasers of an existing franchise business, the right to cool off and terminate the franchise agreement within 14 days of entering into a franchise agreement in which case they are entitled to a refund of monies paid, less the franchisor’s reasonable expenses. We recommend that franchisors should avoid stating any initial franchise fee or deposit as being non-refundable which is in breach of The Code (Clause 26A(4)) and could be considered misleading and render the franchisor liable to a claim by the franchisee. There can be a Retention Sum as long as it is set out clearly in the Disclosure Document if the franchisee elects to pull out in the 14-day cooling off period (as opposed to pulling out in the 14-day disclosure period). Check that your website and marketing material and your agents are aware of these restrictions.

The introduction of the vulnerable workers provisions placed obligations on franchisors to take reasonable steps to ensure their franchisees comply with workplace laws for their staff. Franchisors can be liable for their franchisee’s failure. Therefore, ensure you have access to all the franchisees information. We recommend that the franchisor either control the process or require the franchisees to outsource the workplace and payroll functions to an approved third party. Inaction and ignorance of your franchisees actions regarding payment of their workers is no excuse, reasonable steps will depend on the size of the network and industry in which it operates. Ensure this is part of your operations manual and training and is updated regularly via training to protect your liability as a franchisor, this can include site visits and review of records.

Clause 9(1)(a) of The Code requires franchisors to provide incoming franchisees with a copy of the franchise agreement ‘in the form in which it is to be executed’ to trigger the 14-day disclosure period. The ACCC has indicated sensibly that updating particulars, amending minor errors or incorporating amendments sought by the franchisee will not require a ‘restart’ of the 14-day disclosure period. But if you provide blank draft agreements you should not rely on those as starting the 14-day disclosure period as they will not be in a form to be executed, and the documents need to include all associated documents such as the Occupancy license or lease agreement. Neither party can contract out of the 14-day disclosure period and a breach can mean the franchisee can recover all money it has paid, end the agreement and the ACCC can impose fines and penalties.

Franchisors must include lease documents as part of the disclosure suite, if they are leasing the property to the franchisee, or taking the lease and licencing occupation rights to the franchisee. If the franchise agreement has been signed before lease disclosure is given, the franchisee has the right to cool off and terminate a franchise agreement within 14 days of:

• receiving the first document setting out the terms of the proposed lease, sublease or licence; or
• any later document setting out the terms of the proposed lease, sublease or licence if they are not substantially identical to the terms set out in the first document (except for changes were requested by the franchisee). So, if a lease is updated due to further negotiations, the cooling off period restarts. 

A breach can result in civil penalties (600 penalty units), and also risk the enforcement of the franchise agreements.

Steps to take:

• Franchisors holding the head lease should provide the franchisee with a copy of the lease offer and any head lease with the occupancy license agreement at the same time as giving the disclosure if possible.
• If that is not possible, it is important to remember that the 14-day cooling off period for the franchisee is effectively deferred until you give that information.
• Ensure you keep records of all documents given to the franchisee and dates they received them.

Don’t forget to register your franchise system on the Franchise Disclosure Register and update the information annually as civil penalties may apply where a franchisor fails to do this. Making updating the register part of your annual disclosure process.

Contact: Robert Toth | Special Counsel | Accredited Commercial Law and Franchise Specialist | robert@sanickilawyers.com.au | mobile – 0412 67 37 57