New Code Processes Applicable from 1 January 2015

New Code processes applicable from 1 January 2015

E-Alert: 8 January 2015

With the start of a new year, so too comes the new Franchising Code of Conduct (New Code). This doesn’t just affect the drafting of your franchise agreements and disclosure documents but many of your internal processes too. Here are some reminders and practical tips to assist you in better understanding and implementing the New Code into your franchise systems in 2015:

What should you do? Our Reminders and Practical Tips …

1. Application – the New Code will apply to existing franchise agreements which are renewed or varied in any way from 1 January 2015.
2. Information Statement – you must give this to a prospective franchisee as soon as they show a genuine interest in becoming a franchisee. This is usually when you hand them an application form or they pay a deposit. The statement is set out in Appendix 2 of the New Code.
3. Former franchisee’s details – you can’t induce former franchisees to request their contact details aren’t in the disclosure document after the franchise ends. It’s best to give those details unless the former franchisee says no.
4. Records – you must keep a written record of any document that’s required to be given to a franchisee or prospective franchisee. The records must be kept for at least 6 years, but documents can be kept in electronic form or hard copy.
5. Financial reports – you must provide your current financial/audited statement to franchisees or prospective franchisees (if not attached to the current disclosure document) once they are prepared ASAP but always prior to the franchisee or prospective franchisee signing the franchise agreement.
6. Solvency – Item 22 of Annexure 1 requires you to update any information given under clause 17 if the information has changed between the date of preparation of the disclosure document and the date when this was provided under the New Code.
7. Annual updating of disclosure document –you don’t have to do this if you didn’t enter into a franchise agreement, or only entered into one such agreement, during the financial year and you don’t intend to enter into another one in the following financial year.
8. 14 day disclosure period – in some instances, minor corrections to an executable copy of a franchise agreement won’t re-set the 14 day disclosure period. Otherwise, the usual 14 days applies.
9. Copy of lease/agreement for lease and details of incentives – you must provide these to franchisees.
10. Copy of related agreements – you must provide these at the same time as the executable franchise agreement or ASAP.
11. Marketing fund – marketing fees must be kept in a separate account and you and your associates must contribute the same amount to the fund as your franchisees if you operate one or more units in a franchised business (i.e. as a company owned store/unit). You should disclose any indirect marketing costs (otherwise you must meet the criteria under clause 31).
12. Vote for marketing audit – this must be undertaken annually within 4 months after the end of the relevant financial year (previously it was once every 3 years).
13. Capital expenditure – this should be detailed in the disclosure document with ranges for costs (otherwise you must meet the criteria under clause 30).
14. Cooling off period – the same rules apply to new franchise grants. Remember this won’t apply on a sale of business regardless of whether the purchaser franchisee enters into a new franchise agreement.
15. Consent to a new franchisee buyer – the mandatory 42 days for deemed consent to a transfer of the franchise doesn’t start unless the vendor franchisee provides you with all information that’s reasonably required. You should update your letters to vendor franchisees confirming this.
16. Holding over – be careful when permitting a franchisee to hold over as it could be argued that you’ve granted an extension of the franchise term.
17. Extension of franchise term – note this right in clause 23 is conditional.
18. Good faith – everyone must act in good faith towards each other and not in a capricious manner. This doesn’t mean you can’t act in your legitimate commercial interests though.
19. End of term arrangements – if you’re extending a franchise agreement, the end of term notice must include a statement advising the franchisee that it may request a disclosure document.
20. Right of franchisees to associate – be careful not to breach this right and note it now attracts a penalty if you do so.
21. Master Franchisee – its details are now incorporated into one disclosure document (if applicable).

These are some of the main provisions of the New Code which are likely to affect your internal processes. A number of other requirements are now in force from 1 January 2015 and apply to the conduct of the parties after this date. Beware that some of these requirements will attract penalties if they aren’t complied with.