Clause 19A of the Franchising Code of Conduct prevents a franchisor from passing on its legal fees to franchisees, with one exception. That clause provides:
“A franchisor must not enter into a franchise agreement that has the effect of (a) requiring the franchisee to pay all or part of the franchisor’s costs of legal services relating to preparing, negotiating or executing the agreement or documents relating to the agreement; or (b) allowing the franchisor or an associate of the franchisor to require the franchisee to pay all or part of those costs”
Subclause (2) sets out the sole exception to subclause 1, being “subclause (1) does not prevent the franchisor from entering into a franchise agreement that requires the franchisee to make a payment, before the franchisee starts the franchised business, of a fixed amount of dollars that (a) is specified in the agreement; and (b) is stated in the agreement as being for the franchisor’s costs of legal services relating to preparing, negotiating or executing the agreement; and (c) is stated in the agreement not to include any amount for the franchisor’s costs of legal services that will or may be provided, after the agreement is entered into, in relation to preparing, negotiating or executing other documents”.
Does the Documentation Fee Have to ‘Match’ the Amount Charged by a Franchisor’s Lawyers?
Clause 19A(2) states that the documentation fee must be for the franchisor’s costs of legal services. These words imply that the fee should reflect the actual legal costs incurred by the franchisor. However, there isn’t a strict requirement that the fee exactly matches the legal bill from the franchisor’s lawyers. Ultimately, the Code doesn’t demand a perfect match between what the franchisor pays their lawyers and what they charge the franchisee by way of documentation fee. In our view, however, to ensure compliance with the intent of the clause, it’s safe to have the two figures match.
Can the Franchisor Charge Another Documentation Fee on Renewal?
Our view is that the franchisor can’t charge a documentation fee when the franchise agreement is renewed. While it’s common for new documents to be drawn up during renewal, the key words in clause 19A(2) are that the sole exception applies “before the franchisee starts the franchised business.” These words suggest that the fee is only applicable before the franchise initially begins operations. When a franchise is renewed, the business is already running, so charging a new fee contradicts the intention behind this clause. Therefore, we believe that a second documentation fee on renewal would not be compliant with the Code, and the imposition of such a fee could be deemed void, and the Franchisor subject to penalties.
What documents does 19A Relate to?
We consider that the inclusion of the words “documents relating to the agreement” was intentionally broad. The clause appears to capture such documents as breach notices, termination notices, assignment documentation and variation documentation. Accordingly, beyond the initial documentation fee, franchisors should be very cautious to pass or attempt to pass on any legal fees they incur for any documents prepared which concern the relevant franchisee or franchised business.
Does 19A Impact a Costs Order made in Court Proceedings?
In our view, 19A was not intended to prevent a franchisor from pursuing a costs award in court proceedings where they are successful against a franchisee. A costs award is made by the Court, pursuant to legislation. It follows that payment of costs in legal proceedings is a requirement of a court order. It is not a contractual provision. 19A makes clear the prohibition applies to clauses the franchisor includes in their franchise agreements.
Where do Franchisor’s Get it Wrong?
At Magnolia Legal, we review a lot of franchise agreements. Some of the most common mistakes we see on this topic include:
- Requiring payment of a further documentation fee on renewal;
- Requiring payment of the Franchisor’s legal costs arising in the respect of a franchise assignment or sale;
- Failing to include the wording mandated by 2(b) and 2(c) in the franchise agreement; and
- Including far reaching indemnities that don’t properly account for 19A.
What Happens if 19A is Breached?
Clause 19A is a penalty provision, meaning breaching it can lead to serious consequences. The maximum penalty for a breach is 600 penalty units, which translates to a significant six figure financial hit per breach. The penalty reflects the importance of transparency and fairness in setting fees.
Conclusion
Understanding clause 19A is essential for both franchisors and franchisees. The rules around documentation fees are designed to protect franchisees from unfair charges while still allowing franchisors to cover their legitimate up front legal costs. A franchise lawyer will be able to identify any provisions in a franchise agreement which contradict 19A, and advise what should be done.