Cooling-Off Period Under the Franchising Code: What New Franchisees Need to Know

The cooling-off period is a fundamental part of Australia’s Franchising Code of Conduct (the Code). It’s designed to protect franchisees by giving them a brief window to change their minds after signing a franchise agreement. This article breaks down the key aspects of the cooling-off period, covering what the Code says, how it applies to renewals and extensions, how cooling-off rights can be exercised, and what happens when they are.

What Does the Code Say?

The Franchising Code of Conduct sets out the rules for cooling-off in franchise agreements. According to the Code, franchisees have a right to a cooling-off period that lasts 14 days. This typically starts the day after either the franchise agreement is signed. This means that franchisees can exit an agreement without penalty if they act within this time frame.

Importantly, the Code applies these rules to franchisees in the early stages of the agreement. It doesn’t cover existing franchisees unless the agreement has changed substantially. For those new to franchising, this is especially important as it offers a chance to rethink the commitment. Franchise lawyers often emphasize this cooling-off period as a critical time for franchisees to consult experts, ensuring they fully understand their rights and obligations before proceeding.

How Does the Code Apply to Renewals and Extensions?

The cooling-off period does not generally apply to renewals or extensions of a franchise agreement. Under the Franchising Code, the cooling-off period is specifically for new franchise agreements. When a franchisee renews or extends an existing agreement, they are already familiar with the business, the franchisor, and the terms. The Code assumes they understand the arrangement and may not need the same protection that a new franchisee would require.

However, there is an exception: if the renewal or extension terms create a substantially different agreement, the cooling-off period may apply. For instance, if the franchisor changes the key aspects of the franchise system or significantly alters the terms, the renewed agreement could be seen as a new agreement. In this case, a cooling-off period could be triggered. This aspect is often complicated, and franchisees are advised to work with a franchise lawyer to clarify their rights under such conditions.

How Are Cooling-Off Rights Exercised?

To exercise cooling-off rights, a franchisee needs to act within the 14-day period. They must provide written notice to the franchisor that they intend to terminate the franchise agreement. The notice doesn’t have to follow a specific format, but it should clearly state the franchisee’s decision to exit.

Once the franchisor receives this notice, the process for unwinding the agreement begins. The franchisee should keep a copy of the notice and any correspondence with the franchisor to document their actions. Consulting a franchise lawyer at this stage can also help ensure the franchisee’s rights are protected, as some franchisors may attempt to negotiate or delay.

Timing is critical. Franchisees should act decisively within the cooling-off period to avoid missing this opportunity. Many franchise lawyers recommend reviewing the agreement thoroughly within the first few days after signing to allow time for any last-minute questions or hesitations.

What Happens When Cooling-Off Rights Are Exercised?

When a franchisee exercises their cooling-off rights, the franchisor must return any payments made under the agreement. The Franchising Code requires that this refund is processed within 14 days of the agreement termination. However, the franchisor can deduct “reasonable expenses” that they have incurred in preparing the franchise agreement. These expenses need to be genuine, documented, and should not cover general business costs.

Once the payments are returned, the franchise relationship is effectively ended. The franchisee has no ongoing obligations to the franchisor, and any promises made by the franchisor are nullified. Franchisees are not required to provide a reason for terminating the agreement, and the franchisor is not allowed to penalize them or enforce a non-compete clause for exercising their cooling-off rights.

Cooling off can be a smart move for franchisees who, upon reflection, feel uncertain about the agreement. However, franchisors may view frequent terminations as a red flag, so it’s crucial for franchisees to act in good faith and be as informed as possible beforehand. Franchise lawyers recommend that franchisees consider not just the immediate decision but also the long-term relationship they’re hoping to build with their franchisor.

Conclusion

The cooling-off period is a key protection for franchisees under the Franchising Code of Conduct. It allows new franchisees to step back and reconsider the commitment within 14 days. While the cooling-off period doesn’t generally apply to renewals or extensions, it can if the agreement changes significantly. Franchisees need to exercise this right in writing, and franchisors are required to return any payments made, minus reasonable expenses.

Whether you’re a new or renewing franchisee, it’s essential to know your rights and responsibilities under the Code. Consulting a franchise lawyer during this period can help clarify options and guide you through any challenges that may arise. The cooling-off period is there to protect franchisees, so understanding its application and potential outcomes is a valuable part of entering a franchise agreement.

Disclaimer: This article contains general information only and does not constitute legal advice. Magnolia Legal disclaims any liability arising from reliance on this article. Our terms of use apply