New Franchising Code kicks-in on 1 April
The franchising sector is set to welcome a remade Franchising Code of Conduct, which will come into effect on 1 April 2025 (New Code).
The New Code remakes the Competition and Consumer (Industry Codes – Franchising) Regulations 2014 (Old Code) which is due to sunset on 1 April 2025.
The New Code generally applies to all franchise agreements entered into, transferred, renewed or extended on or after 1 April 2025, however there are some transitional provisions which delay the application of some sections of the New Code (see below for details). The Old Code will continue to apply to all franchise agreements existing before 1 April 2025, until the agreement is terminated, transferred, renewed or extended, at which time the New Code will apply.
The New Code is similar in substance to the Old Code, however, there are some significant updates that have been introduced. The order and numbering of sections contained in the New Code is also different to the Old Code.
Below we have summarised the key changes that franchisors need to be aware of under the New Code, with a particular focus on changes that impact the drafting of franchise agreements and disclosure obligations. We have not summarised all changes in the New Code.
For context, it is best to read the information below in conjunction with the sections of the New Code that are referenced. A copy of the New Code can be found here.
Restraint of trade
Franchisors are now prohibited from entering into a franchise agreement that contains a restraint of trade clause that would apply if:
the agreement contained an option for the franchisee to renew or extend the agreement; and
the franchisor does not renew or extend the agreement in circumstances where the rest of the criteria in section 42 of the New Code are satisfied.
Compensation for early termination
Section 43(2) is relevant to all franchise agreements that are not new vehicle dealership agreements.
Franchisors are prohibited from entering into a franchise agreement unless the agreement provides for the franchisee to be compensated if the agreement is terminated before it expires because the franchisor:
withdraws from the Australian market;
rationalises its networks in Australia; or
changes its distribution models in Australia
The agreement must specify how compensation is to be determined, with specific reference to:
lost profit from direct and indirect revenue;
unamortised capital expenditure requested by the franchisor;
loss of opportunity in selling established goodwill; and
costs of winding up the franchised business
Sections 43(3) and (4) are relevant to all franchise agreements that are not new vehicle dealership agreements.
Franchisors are prohibited from entering into a franchise agreement unless the agreement requires the franchisors to buy back or compensate the franchisee for certain items, in the event the franchise agreement is terminated before its expiry date because of an Early Termination Circumstance.
The items that the franchisor must buy back or compensate the franchisee for are:
outstanding stock purchased by the franchisee that was specified by the franchisor and required to operate the franchise; and
all essential speciality equipment and branded product or merchandise purchased by the franchisee that was specified by the franchisor and required to operate the franchise, and that cannot be repurposed for a similar business.
Reasonable return on investment
Section 44 is relevant to all franchise agreements that are not new vehicle dealership agreements.
This section provides that a franchisor must not enter into a franchise agreement unless the agreement provides the franchisee with a reasonable opportunity to make a return, during the term of the agreement, on any investment required by the franchisor as part of entering into, or under, the agreement.
Termination by franchisor
Under section 57 of the New Code, the circumstances under which a franchisor may terminate on 7 days’ notice have been expanded to include three new grounds involving breaches by the franchisee of certain provisions of the Fair Work Act and the Migration Act (refer specifically to sections 57(1)(d), (e) and (g) of the New Code). However, to rely on these grounds, the termination rights must be included in the franchise agreement.
Expedited dispute resolution is no longer available to franchisees if an agreement is terminated by a franchisor on 7 days notice in the circumstances described in section 57 of the New Code.
However, expedited dispute resolution may continue to be accessed by franchisees if a franchise agreement is terminated by a franchisor on 7 days notice in the circumstances described in section 58 of the New Code.
Significant capital expenditure
Franchisors are now required to include details in their disclosure document of whether the franchisee will be required to undertake significant capital expenditure during the term of the franchise agreement.
This information needs to include details of:
the rationale for the expenditure;
the amount, timing and nature of the expenditure;
the anticipated outcomes and benefits of the expenditure; and
the expected risks associated with the expenditure.
Franchisors must not sign a franchise agreement unless they have first discussed any significant capital expenditure disclosed with the franchisee, including the circumstances in which the franchisee is likely to recoup the expenditure.
