Franchising Updates

Important changes to franchise laws were enacted in April 2022. These affect the potential penalties for breaches of the Franchising Code of Conduct, and also introduce the much awaited public register of franchises.

Increased Penalties

The existing maximum penalties for various breaches of the Code have been doubled, from $66,600 to $133,200 per breach.

However, 2 obligations under the Code now attract a very significant maximum penalty of $10 million per breach (or potentially more).

For any individuals (as opposed to companies) who commit breaches of the kind which attract the $10 million penalty, the maximum penalty is $500,000 per breach.

The Code provisions which attract the $10 million penalty are:

  • Any conduct of a franchisor which would restrict or impair franchisees from associating with each other for a lawful purpose, for example, from forming a franchisee committee; and

  • The continuing obligation to disclose to franchisees or prospective franchisees certain matters involving the franchisor where these are not disclosed in the franchisor’s disclosure document, including where:

    • the franchisor's financial reports are updated before a franchise agreement is signed;

    • there is a change in majority ownership of the franchisor;

    • a court judgement is entered against the franchisor;

    • there is a change in the intellectual property that is material to the franchise system.

This is not a complete list of all of the matters that are the subject of the continuing disclosure obligation. The complete list is at clause 17 of the Code.

The $10 million maximum penalty provisions also apply to some specific obligations of motor vehicle dealer franchisors.

New breaches attracting penalties

Some breaches of the Code which previously did not attract a penalty now do so. Significantly, these include:

  • The obligation to provide an Information Statement to prospective franchisees.

  • The obligation to provide copies of marketing fund financial statements and accompanying audit (if required) to franchisees within 30 days of their preparation. This should be carefully noted, as this obligation is often not strictly complied with by franchisors.

  • Unreasonably withholding consent to a sale of a franchised business.

  • Not giving at least 7 days' notice before termination of a franchise.

  • Requiring franchisee to undertake significant capital expenditure during the term of a franchise, unless this happens in those exceptional circumstances mentioned in the Code, for example where the expenditure is disclosed in the disclosure document.

Franchise Disclosure Register

A franchise disclosure register has been introduced, but it is a significantly watered-down version compared to what had been foreshadowed. Its main purpose appears to be simply to collect statistics on the number of franchise systems operating in Australia at any one time and the industry in which they operate, as well as obtaining the identity and contact details of the franchisors.

Franchisors are required to provide some basic information for inclusion on the Register. Additional information and documents are optional, unless required by the relevant government department. This opens the way for possible additional requirements in future, but there are none as at 27 April 2022.

The information required to be provided by a franchisor is:

  • Its name, and the name under which it carries on business;

  • Its ABN;

  • Its registered office and principal place of business addresses in Australia;

  • Its business telephone number and email address; and

  • The industry classification code of the industry in which it operates, as published by the Australian Bureau of Statistics.

The Register will be stored on and made available by the Internet.

Franchisors who provide disclosure documents to prospective franchisees before 31 October 2022 must upload the information to the Register by 14 November 2022. Franchisors who provide disclosure documents to prospective franchisees after 31 October 2022 must upload the information at least 14 days before they enter into a franchise agreement.

Once a franchisor's information has been included on the Register, the franchisor must confirm each year that the information remains current, or otherwise provide updated information. This must be done by 14 November each year if the franchisor's financial year ends on 30 June, or otherwise by the 14th day of the 5th month following the end of its financial year.

Failing to provide information for the Franchise Disclosure Register, or update or confirm it when obliged to do so attracts a potential maximum penalty of $133,200.

Franchisors can choose to provide additional information or documents for inclusion in the Register. Additional information cannot include personal information relating to particular franchisees or franchise sites. The only documents that may be provided are a disclosure document, key facts sheet and standard form of franchise agreement, but personal information of the kind already mentioned must be redacted from those documents if they are provided.

Provision has been made for lawyers or other representatives to upload the required information on the franchisor’s behalf to the Register if the franchisor follows the prescribed authorisation procedures.