Franchisee? Here’s What You Need To Know Before Signing A Lease

What You Need To Know About Signing A Lease

A lease is a legally binding agreement to pay specific fees for a set term. Just like franchise agreements, leases are governed by the Franchising Code of Conduct (Code) and have their own guidelines.

In Queensland, businesses that are retail in nature and/or situated in a retail shopping centre are subject to the Retail Shop Leases Act 1994 (RSLA). There is similar legislation in other states and territories.

Before signing a lease, there are some important considerations.

1. Offer to lease

The time to negotiate the key terms of the lease, such as rent, reviews and costs, will be in the offer or agreement to lease (OTL). When you sign an OTL you’ll commonly pay a deposit of one month’s rent. Whether the OTL is binding on you will depend on how the document is drafted. If you have a change of mind, you may be able to pull out of the OTL and only forgo your deposit.

2. Legal and accounting advice

If the RSLA applies, you must obtain advice from both a lawyer and an accountant and provide the landlord with certificates from your advisors. Even if the RSLA does not apply, it is prudent to still obtain legal advice because every lease is different and will usually be drafted heavily in favour of the landlord. Remember, there is always room for negotiation of troublesome clauses.

3. Due diligence and disclosure statements

Just like a franchise agreement, carrying out due diligence before signing a lease is vital. The landlord will not warrant that the premises are suitable for your business, therefore you need to determine the suitability of the location and whether the rent is reasonable.

If the RSLA applies, the landlord must provide you a Disclosure Statement which outlines various details about the premises and its location.

4. Timeframes

For retail leases, the landlord must provide their Disclosure Statement to you and a copy of the lease at least 7 days before you sign the lease. A landlord will rarely give you access to the premises until the lease is signed, so always be mindful of matching the commencement date with that under your franchise agreement. As a franchisee in Australia, you should also be mindful of the disclosure and cooling off periods for franchise agreements under the Code.

5. Rent and outgoings

It is common for leases to have a set rent for the first year and then annual increases thereafter. The lease should state whether the increase is by a fixed amount, CPI or a review to market rent.

Outgoings are usually based on the floor area that the premises bear to the whole building. 100% of outgoings will be payable if you are leasing the whole building. A proportion will be payable for a store in a larger centre. Rates, water access charges, waste removal and any other charges the landlord incurs in respect of the premises will be included in outgoings.
If it’s a retail lease the landlord cannot bill you for land tax.

Sometimes the landlord will invoice you once they receive an account from the service provider, or they might estimate the outgoings for the following year and invoice you by equal proportions monthly with rent.

6. Landlord’s legal costs

For retail leases, the landlord must pay their own legal costs for preparing the lease. If the RSLA does not apply, you will likely receive a bill for this. Remember, you can try to negotiate a cap on these costs when negotiating the lease.

If the lease is to be registered on the Title to the property, this will usually be at your cost. Registration is vital to protect your interests for leases over 3 years in length.

7. Term

Leases are for fixed terms, therefore it is important to match the term with your franchise agreement. There will commonly be options to renew the lease for further terms. Be very mindful of the timeframe under the lease to exercise your option. If you miss the deadline then the landlord has no obligation to grant you the option.

There will also be conditions applicable to exercising an option. The landlord might have the right to increase the rent and/or have you refurbish your store. Again, try and match up any refurbishment timelines with those under your franchise agreement.

8. Landlord’s approval

Because the landlord owns the premises, always remember to first obtain their written approval before carrying out any changes. Most leases are strict and will require approval before starting any fit-out works, installing signs or even attending to a fresh coat of paint. As a franchisee in Australia your franchisor may require a specific store design, so ensure the landlord will agree to this before you sign the lease.

9. De-fit

Never assume that you can just hand over the keys to the landlord once the lease ends. Leases will commonly provide that you must remove all of your fit-out and return the premises to the condition they were in when the lease originally commenced.
You may also be required to de-fit and return the premises to a bare shell. De-fits can be expensive, sometimes tens of thousands of dollars, so be sure you know where you stand on this matter before you enter into a lease agreement.

10. Representations

Finally, before signing a lease, always ensure your entire agreement with the landlord is recorded in the lease. This includes any representations or promises made by the landlord that may have impacted on your decision to enter into the lease.

Need advice about signing a lease for your business premises? Talk to the Franchising team at Rouse Lawyers. Contact us today!

It’s that time of the year again – Disclosure Document updates

Well, it’s that time of year again! If you’re a franchisor, it’s time to update your disclosure documents. You’ll need to have finished this within 4 months the end of your financial year. This includes preparation of financial reports for the financial year. For franchisors whose financial year ends on 30 June, you have until 31 October to finalise your reports and disclosure documents.

Updating your documents is an important part of running a franchise system and is mandatory under the Franchising Code of Conduct (the Code).

What does the annual update entail?

When carrying out their annual update, franchisors should consider the following details:

1. Financial details

These must be prepared either in accordance with sections 295 to 297 of the Corporations Act 2001 or by an independent auditor. Your disclosure document must include financial reports for the last 2 financial years. The franchisor must also sign a statement confirming their solvency and ability to pay its debts.

2. A list of current franchisees.

Have there been any new franchisees, sales of existing businesses, terminations of franchise agreements, or franchisees whose operations have ceased?

3. Financial information and payments required under Franchise Agreements.

Have there been any fee increases? For example, in some franchise systems fees increase annually in line with CPI increases.

4. Changes to the intellectual property

Has the franchisor rebranded, introduced a new logo or registered any new trade marks?

5. Major capital expenditure required by franchisee.

Does the Disclosure Document sufficiently cover everything, for example the expenses involved in a store upgrade? An upgrade can include a lot of different things including new software and point of sale systems, signage, furniture and store lay out.

Once updated, the Disclosure Document must be signed by a director or officer of the franchisor.

Failure to update

Failure to comply with disclosure obligations under the Code can result in an infringement notice ($9,000 per breach) or a penalty (up to $54,000 per breach) from the ACCC.

However, exceptions may be granted if no

Franchise Agreements were entered into during the previous financial year (which includes new franchise grants, renewals, transfers or variations to existing Franchise Agreements), and in

the franchisor’s reasonable opinion, they will not be entering into any new Franchise Agreements, renewals, transfers or variations within the next 12 months.

What to do after you update

Updated disclosure documents don’t sit in a draw untouched. They need to be provided:

1. To a prospective franchisee on the grant of a new franchise.

2. To a buyer on the sale of an existing franchisee’s business.

3. To an existing franchisee during the renewal of their Franchise Agreement.

4. To an existing franchisee varying, extending or extending the scope of their Franchise Agreement (for example, extending the term, changing the territory or any other material provision of the Franchise Agreement).

Existing franchisees also have the continuing right to request a copy of the current Disclosure Document (once every 12 months). The franchisor must provide a copy within 14 days of the request. However, if the franchisor has utilised the exception above and not undertaken an annual update, the franchisor must update their disclosure document. Franchisors have 2 months from receiving the request to update their document and provide it to the franchisee.

When is the update required?

Although an update is only required once per year, a franchisor must notify all of its current franchisees within 14 days if any ‘materially relevant’ facts arise. These can be found under clause 17 of the Code and include:

1. Investigations by a public agency (e.g. ASIC) or judgments against the franchisor.

2. Legal proceedings instituted against the franchisor by at least 10% or 10 franchisees (whichever is lower).

3. Change of ownership or control of the franchisor, its intellectual property or the franchise system.

4. The franchisor becoming externally administered.

If any of the above arise, franchisors don’t need to provide an updated disclosure document – they only need to let franchisees know about the ‘materially relevant facts’.

If any ‘materially relevant’ facts happen between annual disclosure document updates, and a franchisor needs to provide a current Disclosure Document to a franchisee, then details of those facts must be provided to the franchisee in a separate annexure to the Disclosure Document.

Disclosure of ‘materially relevant’ facts is essential if you want to keep your franchise agreements. The Courts have set aside franchise agreements, as well as awarding damages, in situations where franchisors have failed to provide adequate and up-to-date information on materially relevant facts.

Marketing funds

If a franchisor operates a marketing fund, it must be audited unless 75% of franchisees who contributed to the fund vote otherwise. A marketing fund must also be audited within 4 months of the end of the franchisor’s financial year. This audit will cover the fund’s receipts and expenses for that financial year. The audited statement and audit report must be provided to franchisees within 30 days of its preparation.

If you need help with a franchise agreement or disclosure document, Speak to the team at Rouse Lawyers. Contact us today!

Here’s What The 2016 Budget Means For You And Your Business.

2016 Budget Pointers

The passing of each federal budget is of interest to those of us that practice in the tax structuring sphere. We will be keenly conscious of changes that may impact upon strategies that have been used previously and looking for opportunities for the implementation of new strategies.

Topic	Commences	Comments
Business Taxes
Small business entity turnover threshold increase	1 July 2016	** Threshold will be increased from $2m to $10m for small business income tax concessions, with the exception of the small business CGT concessions and the unincorporated small business tax discount.NOTE: $10 million threshold applies to the small business restructure rollover.
Small business tax discount increase	Phases from 1 July 2016	** Increased in phases over 10 years from 5% to 16%. The existing cap of $1,000 per individual for each income year will be retained.NOTE: This will effectively reduce the amount of income required for the full offset of $1000 from about $61,500 to $19,200. It now has a favourable comparison to the reduction in the tax rate for small business companies.
Company tax rate will be progressively reduced	Phases from 1 July 2016	** Reduced to 25% over 10 years.
Transfer pricing amendments	1 July 2016	Addresses transfer pricing issues relating to controlled transactions involving intangibles.
40% diverted profits tax	1 July 2017	Applies to company groups with global annual revenue of $1b or more.
Investment in early stage innovative companies		Includes: • a 20% non-refundable tax offset capped at $200,000 per investor per year; and a capital gains tax exemption, provided investments are held for at least three years and less than 10 years. The amendments include: reducing the holding period from three years to 12 months for investors to access the CGT exemption; a time limit on incorporation and criteria for determining if a company is an innovation company under the definition of ‘eligible business’; requiring that the investor and innovation company are non-affiliates; and limiting the investment amount for non-sophisticated investors to qualify for the tax offset to $50,000 or less per income year.
Division 7A amendments	1 July 2018	Targeted amendments will be made to improve the operation of Division 7A including: a self-correction mechanism for inadvertent breaches of Div 7A; appropriate safe-harbour rules to provide certainty; simplified Div 7A loan arrangements; and a number of technical adjustments to improve the operation of Div 7A and provide greater certainty. The above are based on a number of recommendations from the Board of Taxation’s post-implementation review of Div 7A. NOTE: This announcement is merely to consult on the recommendations of the Board of Taxation rather than announcing a law change at this point.
Consolidated groups	1 July 2016	A consolidated group that acquires a subsidiary with deductible liabilities will no longer include those liabilities in the consolidation entry tax cost setting process.
Consolidated groups – securitisation arrangements	3 May 2016	Liabilities will be disregarded if the relevant securitised asset is not recognised for tax purposes. This integrity measure announced in the 2014/15 Federal Budget will be extended to non-financial institutions.
Small business CGT concessions		No change announced.
Non-portfolio dividend exemption		No change announced.
Personal Taxes
Increase in tax	1 July 2016	The 37% marginal tax rate threshold to increase from $80,000 to $87,000.
2% temporary Budget deficit levy		Expires at the end of the 2016-17 financial year – no proposal to extend.
CGT discount		No change announced.
Superannuation
30% rate on contributions	1 July 2017	The threshold for this higher rate of tax is reduced from $300,000 to $250,000.
Concessional contributions cap	1 July 2017	Reduced to $25,000 (including over 50s).
Transition to Retirement Income Streams	1 July 2017	Removal of income tax exemption on earnings that generally applies to pensions, and election to tax as a lump sum.
Non-concessional contributions ($500k cap)	1 July 2017	15 Sep 2016 announcement: This proposal will be replaced by reducing the annual cap to $100,000 and nonconcessional contributions can only be made by those with balances less than $1.6 million (to be indexed). Three-year bring forward rule remains.
Contributions for persons over 65	1 July 2017	15 Sep 2016 announcement: Not proceeding with proposal to remove the work test for people aged between 65 and 74.
Concessional contributions – catch up payments	1 July 2018	Catch up payments for shortfalls over the previous five years allowed for members with balances less than $500,000. 15 Sep 2016 announcement: Introduction delayed until 1 July 2018.
Deduction for personal superannuation contributions	1 July 2017	*** All individuals up to age 75.
Low income superannuation tax offset	1 July 2017	*** The LISTO will provide a non-refundable tax offset to superannuation funds for tax paid on concessional contributions up to a cap of $500. Applies to members with adjusted taxable income up to $37,000.
Spouse Contributions	1 July 2017	*** Income threshold of spouse increased from $10,800-$37,000.
Transfers the pension phase	1 July 2017	Cap of $1.6 million. NOTE: This change also applies to pensions commenced prior to the announcement, and in the writer’s opinion is retrospective. Strategies to address this change should be considered.
Anti-detriment provision	1 July 2017	Abolished from 1 July 2017.
Objective of Superannuation		Enshrined in a stand-alone Act. NOTE: Only enshrined until changed by a later amendment.
GST
Digital currencies		Discussion paper seeking to address the ‘double taxation’ of digital currencies released.
GENERAL 10-year enterprise tax plan		What is described as the 10 year enterprise tax plan is a combination of: increasing the small business entity turnover threshold; increasing the unincorporated small business tax discount; reducing the company tax rate to 25% over 10 years; increasing the 32.5% tax threshold from $80,000 to $87,000 from 1 July 2016;  targeted amendments to Div 7A, better targeting the deductible liabilities measure under the consolidation regime; enhancing asset backed financing; 2 new types of collective investment vehicles (CIVs); reform of the TOFA rules; extending the brewery refund scheme to domestic distillers and producers of low strength beverages; and reducing the WET rebate cap and tightening the eligibility criteria.

** Included in Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
*** Exposure draft released.
NOTE: This article is for general information only and should not be relied upon without first seeking advice from one of our specialist solicitors.

Need expert advice in commercial law, including the implications for you and your business of the 2016 Federal Budget? Speak to the team at Rouse Lawyers. Contact us today!