Is a Deposit Refundable if the Agreement Does Not Proceed?
Whether a deposit is refundable depends on several factors. First, clause 9 of the Franchising Code of Conduct requires the franchisor to provide certain documents to the prospective franchisee. These documents must be provided at least 14 days before the franchise agreement is signed or a non-refundable payment is made. The required documents include the franchise agreement, the disclosure document, the key facts sheet, a copy of the Code, and any relevant lease documents. If the franchisor doesn’t provide these documents, then clause 9 isn’t triggered. Therefore, the franchisor cannot require a non-refundable deposit.
So, whether the deposit is refundable largely depends on whether clause 9 has been satisfied. If the franchisee received the required documents at least 14 days before paying the deposit, then it generally won’t be refundable, provided clause 10 (discussed below) was also complied with. At this stage, the franchisor often informs the franchisee that they will engage a franchise lawyer to prepare the franchise documentation. The deposit is then contributed to those fees.
What does clause 10 of the Code say about deposits?
For a deposit to be non-refundable, however, both clauses 9 and 10 must be satisfied. Clause 10 requires that the franchisee must have signed the required written statement. This statement confirms that the franchisee has received, read, and had a reasonable opportunity to understand the disclosure document and the Code. If this statement is not signed, then the franchisor cannot receive any non-refundable payments at all.
Can a Deposit Be ‘Recharacterized’ as Non-Refundable?
We have seen many instances where franchisors take a deposit right at the start of the process, even before providing the required disclosure. They then inform the franchisee that the deposit will become non-refundable at a later date, like when the franchisor engages a franchise lawyer to prepare the franchise documents. In our view, this is not allowed and likely breaches the Code.
A strict examination of the wording in clauses 9(1)(b) and 10(e) is necessary here. Clause 9 of the Code provides that the franchisor must provide the required disclosure at least 14 days before the franchisee makes a non-refundable payment. Clause 10 of the Code prohibits a franchisor from receiving a non-refundable payment until the franchisee provides the required written statement. This means that, at the later point in time, the deposit has already been made and received. Therefore, the same money can’t be paid or received twice. To err on the side of caution, we recommend that franchisors only take a deposit, or a further deposit, after clauses 9 and 10 have been satisfied. Consulting a franchise lawyer will help ensure compliance with these rules.
What Happens if the Franchisee Exercises Their Statutory Cooling-Off Rights?
Clause 26 of the Code gives franchisees a 14-day cooling-off period after signing the franchise agreement or receiving any relevant lease documents. If the franchisee decides to terminate within this period, the franchisor must refund all payments, including the deposit, within 14 days. However, the franchisor may deduct reasonable expenses from the refund. These expenses or their method of calculation must be clearly set out in the agreement. Common deductible expenses include documentation fees, training costs, and site location fees.
How Are Deposits Disclosed in the Disclosure Document?
The disclosure document must clearly itemize any deposit payable before the franchise agreement is signed. It should also specify the conditions under which the deposit is refundable. Item 14.1 of the disclosure document outlines these requirements.
Key Takeaways
A franchise deposit is a pre-agreement payment that shows the franchisee’s commitment to the opportunity. Whether a deposit is refundable depends on compliance with clauses 9 and 10 of the Franchising Code. Franchisees also have a 14-day cooling-off period to terminate the agreement, with refunds available minus reasonable expenses. Deposits must be clearly itemized and explained in the disclosure document, including refund conditions. Consulting a franchise lawyer helps ensure you fully understand your rights and obligations when dealing with franchise deposits.