Franchisors Must Explain More – Rules Have Changed

From 1 July 2010 Australian franchisors will have to comply with expanded disclosure requirements to prospective franchisees, meaning they must make changes to their disclosure documents and must also begin collecting new types of information reports Australian Law Firm Clayton Utz.

Reports Listing Changes

• Opportunity Not Opportunism: Improving Conduct In Australian Franchising
• Strengthening Statutory Unconscionable Conduct And The Franchising Code of Conduct

New Disclosure Requirements

• Details of future payments by the franchisor to third parties (where such payments are within the knowledge or control of the franchisor, or are reasonably foreseeable by the franchisor)
• Whether the franchisor will require the franchisee to undertake unforeseen significant capital expenditure not disclosed by the franchisor before the franchisee entered into the franchise agreement
• The circumstances in which the franchisor has unilaterally varied a franchise agreement in the last three financial years
• The circumstances in which unilateral variations to a franchise agreement may take place in the future
• Whether a confidentiality obligation will be imposed on the franchisee, and the type of matters that could be covered by the confidentiality obligation
• That franchising is a business and, like any business, the franchise (or franchisor) could fail during the franchise term and this could have consequences for the franchisee
• Whether the franchisor will attribute their costs, including legal costs, incurred in dispute resolution, to the franchisee

Old Disclosure Regime And The New Disclosure regime

The old disclosure requirements will still apply to existing franchisees.

The new disclosure regime will apply to franchise agreements entered into on or after 1 July 2010, which raises a practical problem for franchisors.

They will have to handle two forms of disclosure documents – the current form must be provided annually and upon request to existing franchisees, but the new one to prospective franchisees.

End of the franchise arrangements

Franchisors will need to give more information on:

• what, if any, options the prospective franchisee will have to renew or extend the agreement, or to extend its scope
• entitlements and calculation of exit payments
• what will happen to unsold stock, marketing material, equipment and other assets purchased when the agreement was entered into
• whether the prospective franchisee can sell the business at the end of the agreement, and, if so, whether the franchisor will have first right of refusal, and how market value will be determined
• whether the franchisor will consider any significant capital expenditure undertaken by the franchisee during the agreement in determining what will happen at the end of the franchise agreement, and the extent to which the franchisor has required significant capital expenditure by its franchisees over the last three financial years
• whether the franchisor will amend the franchise agreement on or before the transfer or novation of a franchise agreement

Six Months’ Warning Before The End Of An Arrangement

Franchisors will now have to tell franchisees, at least six months before the franchise agreement ends, whether the franchise agreement will be renewed or not.

This period drops to one month if the franchise agreement is for less than six months.

FOR MORE INFO – read the full Clayton Utz article.