Walker Wayland - Perth Accountants

Sep 2020 4 Minutes

End of franchise term

Original article from the Australian Competition and Consumer Commission (ACCC)

Earlier this year the ACCC took action against Bob Jane Corporation Pty Ltd about its responsibilities in relation to renewal and extension of franchising agreements.

Below the ACCC look at why action was taken and what this court-enforceable undertaking means for you.

The ACCC also set out what franchisors must do before the end of a franchise term. For franchisees, knowing what to expect from your franchisor before the end of your franchise term will help you to make informed decisions about the future direction of your business.

 

What franchisors must do before the end of a franchise term

Franchisors must:

  • notify franchisees, in writing and at least 6 months before the end of the term, about whether they intend to extend or enter into a new agreement. If the term of the agreement is less than 6 months, then the franchisor must give notice at least 1 month before the end of the term.
  • include a statement in the end of term notice to inform the franchisee that they are entitled to a copy of the disclosure document unless they have already requested one in the last 12 months. This is not required if the franchisor does not intend to extend the agreement.

In circumstances where the franchising relationship might continue, franchisors need to be mindful of their mandatory disclosure obligations set out in the Franchising Code.

 

What franchisors must disclose if a franchisee stays on

Franchisors must comply with mandatory disclosure obligations regardless of whether they are entering into a new agreement, renewing or extending the franchise agreement.

This includes:

  • providing franchisees with a copy of the franchise agreement, disclosure document and a copy of the Franchising Code at least 14 days before entering into, renewing or extending a franchise agreement.
  • obtaining a written statement from franchisees confirming they had a reasonable opportunity to understand the disclosure document and the Code before entering into, renewing or extending the term or scope of a franchise agreement.

 

Do the same obligations apply to ‘holding over’ arrangements?

Sometimes franchisors and franchisees will enter a month-to-month, or ‘holding over’, arrangement to extend the agreement beyond its initial term. In our view, you must still comply with the above obligations before extending the franchise agreement via a month-to-month or holding over arrangement.

Note: since amendments to the Franchising Code were introduced on 1 June 2020, different end of term requirements apply to new vehicle dealership agreements.

 

An easy way to get ahead of your end of term arrangements

Franchisors: set a reminder

Even if your franchise agreements are not due to expire soon, you can still take action now. Taking small steps now can save future headaches.

We encourage franchisors to set a reminder for key dates and have the required documentation ready to go well before a franchise agreement is due to expire. Be sure to use the new version of the Code.

Franchisees:  get a head start

Franchisees don’t need to wait to receive an end of term notice before requesting a copy of the Franchisor’s disclosure document.  Remember franchisees can request a copy once every 12 months.

We also encourage franchisees to engage with their franchisor early about end of term arrangements.  Seek the additional information you need and make sure you’re properly informed well before making any big decisions.

Franchisees should seek independent legal, accounting and/or business advice on the risks associated with the end of their franchise agreement (before they sign up to the franchise) as well as on any new agreement or arrangement offered by the franchisor.

What the Bob Jane undertaking means for end of term arrangements

We expect franchisors to do the right thing and comply with the Code. Where franchisors do not comply with the Code, the ACCC may take enforcement action in line with our compliance and enforcement policy.

Earlier this year, the ACCC took action because we were concerned that Bob Jane:

  • failed to notify some franchisees in writing whether it intended to extend or enter into new franchise agreements within the timeframes specified by the Code
  • extended the term of some agreements without first providing required documentation to the franchisees
  • did not get written statements from these franchisees confirming they had read and understood key documentation before extending their agreements.

As a result, Bob Jane has given the ACCC a court-enforceable undertaking to comply with its obligations under the Code in relation to the renewal and extension of franchise agreements. Bob Jane also has to maintain a compliance program for three years.