In Australia, the Franchising Code of Conduct (the Code) sets out strict rules on what information a franchisor must provide to a prospective franchisee before they commit to a franchise agreement. One of the key protections is the 14-day disclosure period, which ensures that franchisees have enough time to review crucial information. This article explains what the Code says about this period, references specific statutory provisions, and discusses the lease disclosure requirements that franchisors must follow.
What Does the Code Say About the 14-Day Disclosure Period?
Under the Franchising Code of Conduct, franchisors are required to provide a disclosure document to prospective franchisees at least 14 days before they sign any franchise agreement or make any payment. This requirement is found in Clause 9 of the Code, which mandates that franchisees receive a set of documents that give them a complete picture of the franchise. The 14-day period begins the day after the franchisee receives these documents.
The purpose of the 14-day disclosure period is to give franchisees time to carefully review and assess the business opportunity. This includes understanding the costs, obligations, and potential risks involved in the franchise. During this period, franchisees are encouraged to seek advice from a franchise lawyer, an accountant, or a business advisor to make an informed decision. Many franchise lawyers emphasize the importance of using this time to ask questions and clarify any terms in the agreement.
What’s Included in the Disclosure Suite?
The disclosure suite is a comprehensive package that franchisors must provide to prospective franchisees, giving them a detailed look at what they’re committing to. Under the Franchising Code of Conduct, this suite includes several key documents. Firstly, there’s the Disclosure Document, which details crucial information about the franchisor, financial commitments, and any restrictions or obligations within the franchise relationship. The suite also includes the Key Facts Sheet—a short summary document introduced to simplify complex information. This sheet highlights essential aspects of the franchise, such as initial and ongoing fees, royalties, marketing fees, and the franchisee’s rights regarding territory and termination.
A copy of the Franchise Agreement in the form in which it is to be executed must also be included. This means the franchisee can review the exact terms they’ll be agreeing to without any variations later on, subject to certain exceptions. Alongside these, the disclosure suite contains the Franchising Code of Conduct, as well a prescribed information statement. Finally, certain lease documents must be disclosed in certain circumstances, discussed below.
What Must the Disclosure Document Include?
The Code specifies the information franchisors must disclose in this document. The disclosure document, per Clause 13 of the Code, must include:
- Franchisor Details: Information about the franchisor’s business experience, key executives, and any relevant litigation history.
- Fees and Costs: A clear outline of all fees the franchisee will incur, including upfront fees, ongoing royalties, and advertising contributions.
- Territory and Exclusivity: Details of the franchisee’s territory, any exclusivity, and conditions on territory boundaries.
- Financial and Operational Information: Information on the franchise system’s financial viability and any earnings projections, where provided.
- Renewal and Termination Rights: Explanation of renewal rights, transfer conditions, and termination clauses.
- Contact Information for Other Franchisees: A list of current and former franchisees, which allows potential franchisees to seek feedback from those with experience in the franchise system.
The Code also requires franchisors to provide a copy of the Franchising Code of Conduct and a Franchise Agreement along with the disclosure document. Together, these documents offer comprehensive insights into the franchise arrangement, allowing potential franchisees to assess whether the opportunity aligns with their financial goals and values.
Lease Disclosure Requirements
When a franchise involves a leased business location, franchisors must provide an additional lease disclosure document. This is particularly relevant when the franchisor is the head tenant, and the franchisee is leasing the premises through a sublease arrangement. Under Clause 13A of the Code, the franchisor is required to provide a lease disclosure document at least 14 days before the franchisee signs the franchise agreement or pays any fees.
The lease disclosure document must contain the following:
- Key lease terms, including the lease duration, rent amount, rent review provisions, and any costs associated with the lease.
- Details of any obligations the franchisee may have to refurbish or upgrade the premises.
- Disclosure of any right the franchisor has to terminate or not renew the lease in certain circumstances.
Understanding lease obligations is crucial, as these costs and commitments can heavily impact the franchisee’s profitability. Franchise lawyers often stress that lease terms, in addition to the franchise agreement, should be thoroughly reviewed during the disclosure period to avoid unexpected expenses or obligations down the road.
How Does the 14-Day Disclosure Period Work in Practice?
The 14-day disclosure period allows franchisees to seek advice and assess the franchise opportunity carefully. The prospective franchisee is encouraged to consult with a franchise lawyer who can help clarify the terms in the agreement and discuss any risks involved. Financial advisors can also assist in evaluating whether the costs and potential returns align with the franchisee’s financial goals.
For franchisors, the 14-day period serves as a clear compliance requirement, and they must ensure all documents are accurate, complete, and delivered within this timeframe. A failure to comply with the 14-day disclosure period can result in penalties, and franchisees may have grounds for legal recourse if the franchisor fails to provide the required information.
What Happens After the 14-Day Disclosure Period?
After the 14-day disclosure period ends, the franchisee can decide to move forward by signing the franchise agreement and making the necessary payments. If they choose to proceed, they’ll enter into a legally binding relationship with the franchisor. However, franchisees still have a cooling-off period of 14 days after signing the franchise agreement, allowing them to terminate the agreement without penalty if they change their mind.
Franchisors must also maintain ongoing disclosure obligations throughout the term of the agreement. This means that if significant changes occur within the franchise, such as changes in ownership, new litigation, or updates to fees, the franchisor is required to disclose these to the franchisee in a timely manner.
Conclusion
The 14-day disclosure period under the Franchising Code of Conduct is a critical safeguard for franchisees. It ensures they have time to review the franchise agreement, disclosure document, and lease terms before making a commitment. This period is protected by specific provisions under Clauses 9, 13, and 13A of the Code, which outline the franchisor’s obligations to provide all necessary information. Franchisees are advised to use this period to consult with a franchise lawyer, accountant, or business advisor, ensuring they fully understand the financial and operational implications of entering into the franchise.
By adhering to the 14-day disclosure period, franchisors and franchisees can foster a transparent and fair relationship, establishing a foundation for a successful and mutually beneficial franchise partnership.