Franchisors face numerous legal obligations, including those imposed by the Franchising Code, the Fair Work Act, the Corporations Act, and various industry-specific regulations. Despite this, many franchisors inadvertently expose themselves to legal vulnerabilities by making common mistakes. In this article, we’ll examine 7 common legal mistakes franchisors make, discussing their implications for franchisors and, crucially, offering solutions to rectify them.
Mistake 1 – Failing to give renewal notices in the prescribed timelines
Clause 18 of the Franchising Code mandates that franchisors must furnish franchisees with a notice at least 6 months prior to the end of the franchise term. This notice should outline whether the franchisor plans to extend the franchise agreement (i.e., prolong the term) or initiate a new agreement (i.e., a renewal agreement). Additionally, the notice must include a statement informing the franchisee of their right to request a disclosure document.
Failure to adhere to this requirement, including omitting the statement, exposes franchisors to potential civil penalties, with the maximum penalty currently $187,800 per breach.
If you’re a franchisor who isn’t routinely fulfilling this obligation, it’s crucial to maintain records of the deadline for providing this notice to each franchisee and ensure compliance by the specified date. Additionally, be mindful of any clauses in your franchise agreement detailing the method of serving notices and the timeframe when notices will be deemed to have been sent (e.g., if sent by mail).
Mistake 2 – Failing to give adequate detail in marketing fund reports
Clause 15(1)(b) of the Franchising Code mandates that Franchisors must annually prepare financial statements for their marketing funds by October 31st each year. These statements must contain “meaningful information” regarding the income and expenditure of the fund. Simply providing a broad description of marketing activities does not suffice; franchisors must furnish specific details regarding the recipients of the funds and the purpose of the expenditures. For instance, a statement indicating expenditure on “radio ads” would likely fail to meet the meaningful information criterion. Instead, the statement should specify the recipients of the funds, the nature of the ads (e.g., “Black Friday Campaign”), where the ads were aired, the frequency of airing, and the duration of the campaign.
Failing to abide by this obligation, again, exposes franchisors to potential civil penalties, with the maximum penalty currently $187,800 per breach.
Franchisors should have their draft marketing fund statements reviewed by a lawyer to ensure they meet the standards. Additionally, its imperative franchisors keep extensive records of the incomings and outgoings of their marketing fund accounts, to enable them to add the required level of detail to the report.
Mistake 3 – Referring to franchise fees as ‘non-refundable’
The Code grants franchisees, including renewing franchisees and those purchasing an existing franchise business, the right to cool off and terminate the franchise agreement in certain circumstances. Most commonly, franchisees can terminate within 14 days of entering into a franchise agreement. If they do, they are entitled to a refund of monies paid, less the franchisor’s reasonable expenses.
Given franchisees have this right, franchisors should avoid characterising an initial franchise fee as non-refundable in promotional materials and in the franchise agreement itself. If they do, this could be deemed misleading and render the franchisor liable to a claim by the franchisee. It could also be a breach of clause 26A(4) of the Code.
Mistake 4 – Failing to provide workplace law information
The introduction of the vulnerable workers provisions placed an obligation on franchisors to take reasonable steps to ensure their franchisees compliance with workplace laws. What those reasonable steps are will depend on the size of the network and industry in which it operates. However, every franchisor should be doing something.
Providing information about applicable workplace laws and some form of training on this topic is an essential step every franchisor should be undertaking to ensure they are taking reasonable steps.
Mistake 5 – Failing to register on the Franchise Disclosure Register
Almost all franchisors are required to register certain information on the Franchise Disclosure Register. Additionally, Franchisors must update the information annually. Civil penalties may apply where a franchisor fails to do this.
To avoid breaching the requirements of the Franchising Code and rendering yourself liable for penalties, franchisors should ensure they are registered, and make updating the register part of the annual disclosure process.
Mistake 6 – Relying on pro-forma documents to trigger the disclosure period
Clause 9(1)(a) requires franchisors to provide incoming franchisees with a copy of the franchise agreement ‘in the form in which it is to be executed’ to trigger the 14 day disclosure period. Unhelpfully, that term is not defined. The ACCC has provided some guidance on this point. It provides that updating particulars, amending minor errors or incorporating amendments sought by the franchisee will not require a ‘restart’ of the disclosure period.
Based on this, it’s unclear if provision of an unpopulated franchise agreement in a franchisor’s standard form would meet the requirements imposed by 9(1)(a). It follows that franchise agreements that are ‘non-standard’, for example because they include numerous special conditions, would need to be disclosed with those special conditions included to meet the criteria of the ‘form in which it is to be executed’.
To err on the safe side, franchisors should provide the populated franchise agreement at the start of the disclosure period. This is particularly important where a breach of clause 9(1)(a) can render a franchisor liable for penalties.
Mistake 7 – Not abiding by the lease disclosure requirements
Changes to the Code introduced in 2021 broadened the obligations of franchisors with respect to disclosure of lease documents, and expanded the rights of franchisees to cool-off (i.e. call off the franchise agreement) in certain circumstances. They added another layer of complexity to the franchise contract formation process, which we wrote about in our article here. While these obligations have some complexity, in summary:
- Franchisors must include lease documents as part of the disclosure suite, if they are leasing the property to the franchisee, or taking the lease and licencing occupation rights to the franchisee;
- If the franchise agreement has been signed before lease disclosure is given, the franchisee has the right to cool off and terminate a franchise agreement within 14 days of:
- (a) receiving the first document setting out the terms of the proposed lease, sublease or licence ;OR
- (b) any later document setting out the terms of the proposed lease, sublease or licence if they are not substantially identical to the terms set out in the first document (except where the changes were requested by the franchisee). Accordingly, if a lease is updated (for example, because of negotiations), the cooling off period restarts.
Failure to abide by these obligations can result in civil penalties (600 penalty units), and can also bring into question the validity of relevant franchise agreements.
Franchisors should:
- Develop a process to ensure all lease documents are passed on to their franchisees, and a record is kept of that;
- Keep franchisees informed of their cooling off rights; and
- Where possible negotiate standard lease terms with regular lessors (for example, Westfields and Stockland) so the terms of the lease are clear from the outset.
What to do if you have made one of these common mistakes
If you have made one of the errors identified in this article, you should fix it, and fix it fast. Most of these errors can’t be ‘undone’. However, if they have occurred, you should seek legal advice as to how to best mitigate your risks. At Magnolia Legal, we excel in getting franchisors legally compliant, and offer an extensive franchisor audit. Get in touch for an obligation free chat if you would like to discuss how we can help you.