The New Code introduces critical changes affecting franchisors and franchisees. These updates focus on the consideration period, handling of non-refundable payments, and limits on documentation fees. This article outlines the key process changes for franchisors, including disclosure obligations, deposits, documentation fees, and cooling-off rights.
1. Opt-Out Provisions for Disclosure Documents
Under the New Code, franchisees must have the Franchise Documents for 14 days before signing, unless they qualify to opt out.
Key Change (Section 23(4)):
Prospective franchisees can opt out of receiving certain documents, such as the disclosure document and a copy of the Franchising Code, by providing written notice.
This applies if:
- The franchisee currently has or recently had another substantially similar franchise agreement with the franchisor.
- The business covered by the new agreement is substantially the same as the previous one.
This change simplifies processes for experienced franchisees who do not need duplicate documents.
What Should Franchisors Do?
Franchisors should:
- Update internal processes and templates to include this opt-out right.
- Ensure franchisees provide written notice when exercising this right.
- Store written notices with the executed documents for compliance.
2. Opt-Out Provisions for Cooling-Off
Section 50(6) allows franchisees to opt out of cooling-off rights under certain conditions.
Key Change:
A franchisee can waive cooling-off rights if:
- They currently have or recently had a substantially similar franchise agreement.
- The business covered by the new agreement is substantially the same as the previous one.
- They provide written notice to opt out.
What Should Franchisors Do?
To streamline contract formation, franchisors should:
- Include a notice of this right in processes and templates.
- Ensure any opt-out is in writing and saved with executed documents.
3. Changes to Non-Refundable Payments
The New Code changes when and how franchisors can accept non-refundable payments from prospective franchisees.
Key Change (Section 23):
- If a franchisee pays a franchisor within the 14-day consideration period, they can request a refund in writing.
- The franchisor must refund the payment within 14 days.
- Failure to comply incurs a civil penalty.
Key Change (Section 26):
- Non-refundable payments can only be accepted after the consideration period ends.
- The franchisee must first receive all prescribed documents, including the final Franchise Agreement.
What Should Franchisors Do?
- Do not accept non-refundable payments before the consideration period ends.
- If requesting a deposit, clearly state whether it will apply to legal fees (the Documentation Fee) and that it is non-refundable.
- Prevent refund disputes and penalties by ensuring payments align with the New Code.
4. Limits on Documentation Fees
The New Code restricts what franchisors can charge for documentation fees.
Key Change (Section 65):
- Documentation fees must not exceed the reasonable and genuine costs of services provided.
- Franchisors cannot charge franchisees for their legal costs related to preparing, negotiating, or executing the franchise agreement.
What Should Franchisors Do?
- Ensure the Documentation Fee aligns with actual legal costs.
- Update the Franchise Agreement to include the mandatory wording from Section 65(b).
Final Thoughts
These changes require franchisors to review processes, update agreements, and comply with new restrictions. A franchise lawyer can help ensure full compliance and avoid penalties. By staying proactive, franchisors can streamline contract formation while protecting both their business and franchisees.