The Franchising Code of Conduct has undergone its biggest set of changes since 2020. Photo: wutzkoh.
The rules in the world of franchising keep changing and failure to keep up could cost you big time.
In efforts to tighten protections, close loopholes and rebalance power in an industry worth billions, the government has amended the Franchising Code of Conduct – the industry’s core regulation – eight times in the past decade alone. The biggest shake-ups came in 2015, 2020, and most recently on 1 April this year.
MV Law partner Massimo Di Maio, who has been immersed in this tightly patrolled area of the law for 15 years, says it’s hard for franchisees and franchisors to stay abreast of the changes.
“It’s an area of law that requires specialist knowledge,” he says. “This latest update not only changes certain provisions and concepts, but introduces new concepts that were not dealt with in the old code, or extends them to existing franchise agreements that weren’t impacted before.”
Broadly, the new code uses new terminology and formatting and expands on its purpose. The rollout for certain aspects of the update is staggered. The new code applies directly to any Franchise Agreement (FA) entered into on or after 1 April 2025.
The old code will continue to apply to any FAs entered into before this date, until those FAs are transferred, renewed or extended after 1 April 2025, at which point they will be captured and governed by the new code.
Certain provisions of the new code will only come into play on 1 November.
“Some industries will need to pay close attention to this lingering transition period and adjust documentation further,” Mr Di Maio says.
Among provisions starting on 1 November is one that extends protection to all franchise agreements; the old code afforded this only to new vehicle dealership agreements.
Under the new code, all franchisors – not just new motor vehicle dealership franchisors – must include provisions in their FAs that ensure a franchisee will be compensated for early termination if the franchisor withdraws from, changes distribution models or enters rationalises its networks in the Australian market.
MV Law partner Massimo Di Maio says changes to the Franchising Code of Conduct aim to address power imbalances by providing more protection to franchisees and increasing disclosure to ensure they’re fully informed before signing. Photo: Liv Cameron.
Another change that comes into effect from 1 November has been welcomed by franchisees as a much-needed equaliser – the Return on Investment (ROI) requirement.
This impacts franchisors who need an investment from franchisees to meet the requirements of their brand.
Under the new code, franchisors must ensure their FAs provide franchisees with a “reasonable opportunity” to make a return on these investments.
“In the past there may have been some franchisors that required franchisees to invest and then terminated their franchise agreement. The franchisee is left with nothing because the minute their agreement is terminated they no longer have the right to use the business collateral like logos and so on, plus they’re out the costs of their investment,” Mr Di Maio says.
“The ROI requirement will raise the bar for what’s considered ‘reasonable’ in terms of asking franchisees to spend money on a franchise business, in part to further address the imbalance between franchisors and franchisees.”
Franchisors should know that under the new code, it’s much easier to be slapped with eye-watering financial consequences that could devastate even the biggest players.
Previously, only some contraventions attracted penalties and the maximum fine could be capped at $198,000 per breach.
Now most breaches can lead to a fine and a new section borrows the big penalties from Australia’s Competition and Consumer Act. This allows large fines – $10 million or more per breach – for serious misconduct, including if the franchisor fails to include their financial details in their disclosure document.
“To be clear, if you’ve broken the same rule in all your franchise agreements, that amount is multiplied per franchise,” Mr Di Maio says.
“Furthermore, if the court can determine the value of the benefit the franchisor has obtained from that breach, then they’ll fine them three times that value. If not, it’ll be 10 per cent of the franchise’s adjusted turnover over the year since the month the contravention occurred.
“Where previously a big player might’ve crunched the numbers and decided that the benefit of the breach outweighed the penalty, those days are over.”
One change that arguably benefits both parties is the ability for franchisees to opt out of the 14-day cooling-off period for new franchise agreements with the same franchisor, provided they currently have or recently had a substantially similar agreement.
“This fixes some of the more cumbersome elements of the old code. It means if a franchisee says ‘I’m so happy with my franchise, I want to open a second location’, this simplifies things greatly,” Mr Di Maio says.
He says the changes herald a time for franchisees and franchisors to get advice.
“Franchisors will want to take steps to avoid hefty penalties and franchisees will want to ensure they’re not missing out on benefits they’re entitled to.”
For more information contact MV Law.
