Clause 38 of the Franchising Code of Conduct regulates when and how a franchisor can recover legal costs from a franchisee. This is an area where many franchisors — often unintentionally — find themselves in breach. If you’re charging legal fees to franchisees, it’s essential to understand exactly what is and isn’t permitted.
The General Rule – Legal Fees Are Not Recoverable
Clause 38(1) makes it clear: franchisors must not enter into franchise agreements that require the franchisee to pay any part of the franchisor’s legal costs for preparing, negotiating, or executing the agreement or documents relating to the agreement. The provision also prevents franchisors from building in a clause that allows them (or an associate) to recover those costs later.
Importantly, breaching this provision exposes the franchisor to a civil penalty of up to 600 penalty units (over $180,000 per contravention at current rates), which underlines how seriously this restriction is treated under the Code.
The Narrow Exception – A Fixed, Pre-Start Legal Fee
Clause 38(2) carves out a limited exception. A franchisor may charge a fixed dollar amount for legal costs, but only if all of the following conditions are met: the fee must be specified in the franchise agreement; it must be described as being for the franchisor’s costs of preparing, negotiating or executing the agreement; it must be paid before the franchisee starts trading; and the amount must be the reasonable and genuine cost of those services.
The agreement must also state that the amount does not include any future legal services, such as preparing further documents after the franchise has commenced. Clause 38(2)(c) is particularly critical — it requires that the dollar figure is not inflated, estimated loosely or rounded up, but instead reflects an accurate assessment of what the legal work actually costs. For this reason, many franchisors will seek a quote or cost breakdown from their franchise lawyer to substantiate the amount.
That figure must then appear consistently in the disclosure document. Any discrepancy between the two can cause compliance issues — so attention to detail is key.
What Does “Relating to the Agreement” Actually Mean?
The phrase “relating to the agreement” appears deliberately broad — and in our view, it is. It is likely to capture not just the franchise agreement itself, but also associated documents like guarantees, site licences, disclosure acknowledgments, leases, brand agreements and other materials that form part of the onboarding process.
That said, this precise wording in this provision has not yet been interpreted by a court, so there is a degree of legal uncertainty. In the absence of case law, the general principles of statutory interpretation apply. Courts will consider the purpose of the provision, the language used, and the policy intent of the Code. On that basis, we believe it is safer to assume that anything forming part of the franchise establishment process — even if technically separate — will fall within the ambit of clause 38.
In practical terms, this means legal costs for lease negotiations, fitout deeds, and similar documents should either be absorbed by the franchisor or built into the fixed fee allowed under clause 38(2). Charging additional or rolling legal fees is not permitted.
No Further Fees at Renewal
Another key misconception is that franchisors can charge a further documentation or legal fee at renewal — especially if a new agreement is being signed. However, this is not allowed. Clause 38(2) only permits a fee to be charged before the franchisee begins operating the business. At renewal, the franchisee is not starting anew — they are continuing an existing business — and therefore no new legal charge can be imposed. Any attempt to include such a fee may breach the Code.
What About Legal Costs in Disputes?
Clause 38 only applies to legal fees associated with entering into or preparing franchise documentation — not to mediation or litigation. If a franchise dispute arises and proceeds to court, normal rules of civil procedure apply, and a franchisor may seek an award of costs if successful. There are several decisions of the Federal Court awarding costs in favour of the franchisor, providing authority that clause 38 does not limit the court’s discretion to award costs.
Mediation costs are treated differently. Under the Franchising Code, parties are required to share mediation costs equally, unless they agree otherwise. Clause 38 does not alter this obligation.
Key Takeaways for Franchisors
You can only charge a legal fee if it meets all of clause 38(2)’s strict conditions. The fee must be fixed, pre-commencement, accurately reflect genuine costs, and exclude any post-agreement legal services. It must also be disclosed consistently across the franchise agreement and disclosure document. Additional legal charges — including for lease documentation, renewals or side agreements — are not permitted unless clearly captured within the upfront fixed fee. Clause 38 does not apply to enforcement costs, mediation or litigation.
Speak to a Franchise Lawyer Before Charging Legal Fees
This is a common area of non-compliance. If you’re unsure whether your current documentation meets the Code’s requirements, we strongly recommend a review by a franchise lawyer. At Magnolia Legal, we help franchisors draft compliant franchise agreements, refine their disclosure documents, and avoid the pitfalls that can result in large financial penalties or unenforceable fee clauses.
If you need assistance updating your franchise fee model or aligning your legal cost provisions with the Code, get in touch — we’d be happy to help.