Understanding the Franchising Code and Capital Expenditure

Franchisors need to know what the Franchising Code says about capital expenditure. More importantly, franchisors should ensure their disclosure documents comply with the Code’s requirements for disclosing potential capital expenditure. Without this knowledge and compliance, franchisors could struggle to enforce expenditure by franchisees. They may even face hefty penalties.

So, what does the Franchising Code require concerning Capital Expenditure? What exactly is Capital Expenditure? Importantly, what questions should a franchisor ask themselves to promote compliance with these provisions? Franchisors must address these questions while preserving their right to improve the network, ensure consistent fitout and branding, and introduce new equipment requirements.

Clause 30 of the Franchising Code

Clause 30 of the Franchising Code states that a franchisor cannot require “Significant Capital Expenditure” during the term of a franchise agreement.

If a franchisor demands such expenditure, the maximum penalty is 600 penalty units. 

Although the Franchising Code does not define Significant Capital Expenditure, clause 30(2) specifies exclusions, being:

  • Expenditure disclosed to a franchisee in the disclosure document before entering into, renewing, or extending the franchise agreement; 
  • Expenditure approved by a majority of franchisees if it applies to all or most of them; 
  • Expenditure needed to comply with legislation; or
  • Expenditure agreed upon by the franchisee. 


The Franchising Code also requires franchisors to include ‘as much information as practicable’, including the following details:

  • The rationale for the expenditure
  • The amount, timing, and nature of the expenditure
  • The anticipated outcomes and benefits of the expenditure
  • The expected risks associated with the expenditure


Helpfully, the Code even provides an example here, noting The information could include the type of any upgrades to facilities or premises, any planned changes to the corporate identity of the franchisor’s brand and indicative costs for any building materials.

What is a Capital Expenditure?

The Franchising Code doesn’t define ‘capital expenditure’. It generally means money spent on acquiring or improving fixed assets, like premises and equipment.

No doubt franchisors may need to change product or service offering across their networks, and wish to maintain a consistent image by all franchisees. This may require franchisees to buy new equipment or undertake expensive refurbishments. These are examples of operational expenses that qualify as capital expenditures.

Key examples of significant capital expenditures include:

  • Renovating or fitting out premises
  • Purchasing a new vehicle
  • Purchasing significant new equipment, like new machinery 
  • Upgrading equipment or hardware to enhance the franchise business.

What do Franchisors Need to Do?

For the purpose of ensuring their disclosure document provides a basis to require capital expenditure, franchisor’s should consider: 

  1. Will we require or may we wish to require franchisees to upgrade or refurbish premises? 
  2. Do we propose or may we wish to require a rebrand, necessitating changing of signage and get-up?
  3. Is there the potential to introduce new offerings in the network that will necessitate the purchase of additional equipment or require a change to fitouts? 
  4. Do we want to have the ability to require franchisees to update their premises? 
  5. Do we want to have the ability to require franchisees to update vehicles? 


If the answer to any of the above is ‘yes’, then the estimated costs need to be disclosed in item 14 of the disclosure document, and the relevant detail included.


Key Takeaways

  • Disclosure Compliance: Franchisors must ensure their disclosure documents comply with the Franchising Code’s requirements for disclosing potential capital expenditure to avoid enforcement issues and hefty penalties.
  • Clause 30 Restrictions: Clause 30 of the Franchising Code prohibits requiring “Significant Capital Expenditure” during a franchise agreement term, with certain exclusions like pre-disclosed expenses, legislatively mandated costs, and franchisee-agreed expenses.
  • Essential Questions: Franchisors should assess potential requirements for franchisee upgrades or refurbishments, rebranding, and new equipment introductions. If applicable, they must disclose estimated costs and relevant details in the disclosure document.


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