What does the new Code have to say about franchise renewals? The renewal or extension of a franchise agreement is an important right and can greatly impact on the franchisor and franchisee in different ways so with a fresh Code on hand, it’s important to understand the nuances of the new regulations.

The transitional provisions under the new Code

Franchisors’ obligations under the 1998 Code will continue beyond 1 January 2015 so where the agreement was entered into before 1 January 2015 any existing obligations will continue. For example, the end of term obligations of the franchisor under the new Code, will not apply to an existing pre 1 January 2015 franchise agreement unless that agreement was varied or transferred on or after 1 January 2015.

An extension of the term of the pre 1 January 2015 agreement on or after 1 January 2015, would bring it under the new Code in its entirety, without any carve outs.

Even a minor variation to a pre 1 January 2015 franchise agreement will be sufficient to bring that agreement under the new Code entirely.

New Code definitions

The definitions under the new Code (Clause 4) are important in understanding the renewal rights and obligations of a franchisor and franchisee the terms. Extension and renewal are now clearly defined.

Extend under the Code, means a material change to:

         i.            the terms and conditions (scope) of the agreement; or

       ii.            the rights of a person under or in relation to the agreement; or

      iii.            liabilities that would be imposed on a person under or in relation to the agreement

An extension of the term of a franchise agreement therefore occurs other than, where an option is exercised by the franchisee.     

Renewal occurs when the franchisee exercises an option to renew the agreement.

Renewal does not exclude a conditional renewal under the New Code so the new franchise agreement does not have to be identical to the existing agreement.

The new franchise agreement can contain new provisions and conditions such as new sales targets or licensing requirements as a condition to the franchisee’s right to exercise its option.

The following example may assist to highlight the difference:

A franchisor, Doug’s Cleaning Services, grant’s Shirley a franchise term of five years, with one option of five years. If Shirley, the franchisee, exercises her option, this is a renewal under the Code. If Shirley does not exercise her option, and the parties agree to vary or extend her existing agreement this is an extension.

The definition of transfer of a franchise agreement is also important as the definition of “novation” in the 1998 Code, has been deleted.

A change in control of the franchise business with the consent of the franchisor, is deemed a transfer, not a new franchise agreement.

A transfer includes situations where:

         i.            the existing agreement is terminated on the basis that a new franchise agreement will be entered into between the franchisor and new transferee (this occurs where the existing franchisee has sold its business on the basis that the franchisor will enter into a new franchise agreement with the purchaser.)

       ii.            the franchisee’s rights under the agreement are assigned to a prospective transferee (where the franchisee sells its business and transfers its existing franchise agreement to the incoming franchisee) or;

      iii.            the agreement contemplates a transfer such as change in effective control, where a company in its shareholding.

Disclosure on renewal by franchisors

Where there is a renewal of a franchise agreement or extension, Subclause 9(2) of the Code requires the franchisor to give the existing franchisee the latest version of its disclosure document (which must have been updated within four months of the end of the financial year) at least 14 days before renewal or extension of the franchise agreement.

A franchisor who fails to provide an existing franchisee with a copy of the Code and Disclosure documents at least 14 days before renewal or extension or payment by the franchisee of a non-refundable payment, is subject to a civil penalty of 300 penalty units (that is a fine of $51,000).

Franchisors should also provide their existing franchisees with the Clause 10 legal and independent business advice and accountants advice certificates.

End of term issues

The end of term provisions, under Clause 18 of the Code, are also relevant to the issue of franchisee renewals. A franchisor must give a franchisee notice in writing whether it intends to extend the franchise agreement or enter into a new agreement not less than six months before the end of the franchise term. If the franchisor intends to extend the agreement, it must also advise the franchisee that they can request an up to date disclosure document from the franchisor.

A failure to provide the notice not less than six months before the end of the term to the franchisee or not advising the franchisee that they can request a disclosure document, may leave the franchisor liable to a civil penalty of 300 penalty units.

If the franchisor does not agree to extend the existing agreement or enter into a new agreement and fails to offer the franchisee genuine compensation for its good will at the expiry of the agreement, the franchisor will not then be able to enforce any non-compete provisions against the franchisee. The provisions however which relate to non-solicitation of staff, and not using the franchisee’s intellectual property will still be able to be enforced by the franchisor. This is therefore an important issue to be considered by franchisors.

Key issues under the new Code

• Franchisors must ensure that they maintain all records and documents and diarise critical dates in respect to each of their franchisees to ensure their compliance with the Code and also in case of audit or inspection of the records by the ACCC to avoid possible civil penalties.
• Diarise the date an Information Statement is supplied to the franchisee and make sure all documents are signed and dated.  
• Diarise the date not less than six months before the end of term to give the franchisors notice.
• Don’t forget the ongoing disclosure obligations required under the Code, if there are significant changes to the system that may affect the franchisee.
• Monitor franchisee performance and consider the end of term obligations to extend or renew the franchise agreement.

There are tricks and traps and it is likely that franchisors and franchisees may become complacent so seek specialist franchise advice to protect your rights.  

The Code requires both parties to act in good faith which relates to not only negotiations going into the agreement and conduct during the term but also negotiating the exit arrangements.

So keep your records up to date and complete as that will be critical to asserting your rights, protecting your goodwill and avoiding disputes and possible financial penalties.