Get your Disclosure Documents ready…. or pay the price

 

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Forget to update your disclosure documents at your peril.

Franchisors must update their disclosure documents within 4 months of the end of their financial year. That means that most franchisors who operate on a standard financial year ending on 30 June must finalise their update by 31 October.

The annual update is an important part of running a franchise system and is mandatory under the Franchising Code of Conduct. It should never be overlooked lightly.

What does the annual update involve?

You should consider the following:

1. Financial reports for the previous 2 financial years must be prepared in accordance with the Code’s guidelines. The disclosure document must include copies of these reports or an independent audit report of them.
2. All details within your disclosure document should be up-to-date, including:

• The list of current franchisees. Have there been any new franchisees, sales of existing businesses, franchise agreements which have terminated or franchisees who have ceased to operate?
• The list of franchisees who have left the system within the last 3 financial years, including a contact email and/or phone number.
• If you operate a marketing or advertising fund, then details of the fund’s expenses for the last financial year.
• Financial information and payments required under the franchise agreement. Have there been any fee increases?
• Changes to the intellectual property. Have you rebranded, introduced a new logo or registered any new trade marks?
• Major capital expenditure expected to be incurred by franchisees. Does your 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 fit-out.

3. Once updated, your disclosure document must be signed by a director or company officer, along with a statement confirming your solvency and ability to pay your debts.

What if you fail to update? Is there an exemption?

Failure to comply with disclosure obligations under the Code can attract penalties of up to $63,000 in each instance, and these breaches may lead to infringement notices issued by the ACCC for $10,500 per breach.

The exemption to the annual update requirement is:

1. 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
2. in your reasonable opinion, you will not be entering into any new franchise agreements, renewals, transfers or variations within the next 12 months.

Ok, the update is complete, now what?

The updated disclosure document won’t sit in a draw untouched until the next annual update. It will need to be provided to franchisees in the following situations:

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 a franchisee who desires to renew their franchise agreement.
4. To a 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).
5. To an existing franchisee who has requested a copy of your current disclosure document. The right to make this request is limited to once every 12 months. You must provide a copy within 14 days of the request. However, if you have not undertaken your annual update (per the exemption discussed above), you must then update your disclosure document and provide it to the franchisee within 2 months of the request.

Is the update only required once per year?   

Whilst the update is only required once per year, you are still obliged to notify all your current franchisees within 14 days of the occurrence of any ‘materially relevant’ facts, which can be found under section 17 of the Code and include:

1. Investigations by a public agency (e.g. ASIC) or judgments against you.
2. Legal proceedings instituted against you by at least 10% or 10 franchisees (whichever is lower).
3. Change of ownership or control of the franchisor, your intellectual property or the franchise system.
4. The franchisor becoming externally administered.

This doesn’t mean you are automatically required to provide a copy of your current disclosure document to all franchisees. You are only required to provide details of the ‘materially relevant’ facts.

However, if any of these ‘materially relevant’ facts occur between your annual updates, and you become required to provide a current disclosure document to a franchisee (for example upon request or the other situations discussed above), then details of the ‘materially relevant’ facts must be provided to the franchisee in a separate annexure to the disclosure document.

Disclosure of these ‘materially relevant’ facts is essential. The courts have set aside franchise agreements and awarded compensation to franchisees in some situations where franchisors have failed to provide adequate and up-to-date disclosure. This is when the franchisee can establish they would not have entered into the franchise agreement had they received adequate disclosure.

Finally, don’t forget to audit your marketing fund

If you operate a marketing or advertising fund, unless 75% of your franchisees who contribute to the fund vote otherwise, the fund must also be audited within the same timeframe to update your disclosure document. This will be an audit of 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.

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By Luke McKavanagh, Rouse Lawyers

This article was previously published on the Inside Franchise Business website.

The post Get your Disclosure Documents ready…. or pay the price appeared first on Rouse Lawyers.

Should your Franchise Agreement be Negotiable?

“Take it or leave it” is the traditional response given to a prospective franchisee asking to negotiate a franchise agreement. Whilst franchisors may sometimes agree to special conditions such as reduced fees or other concessions while the franchisee establishes their customer base, franchisors generally don’t negotiate the key provisions of a franchise agreement.

Despite tradition, franchisors should always carefully consider a request to negotiate an agreement.

Are you in a position to say no?

Franchisors of new systems may see negotiating as a quicker way to grow their franchisee numbers. However, being too eager to negotiate or too willing to part with your brand standards could devalue your system in the long run.

Generally, the older and larger the franchise system, the more reluctant a franchisor will be to negotiate. The franchisor’s template franchise agreement will often be tried and tested, and in the franchisor’s opinion, strikes a reasonable balance between the interests of franchisee and franchisor.

Franchisors of established systems don’t need to negotiate their agreements in order to grow their system. If a prospective franchisee is unsuccessful at negotiating and decides not to proceed, there will usually be someone else willing to take the same franchise agreement as-is. This is not to say that franchisors shouldn’t negotiate if a franchisee raises a valid request.

Some reasonable requests may include changing the term of the franchise agreement to match the term of the franchisee’s lease or granting the franchisee the first right of refusal to buy a neighbouring territory. What’s reasonable will always depend on the circumstances.

Be mindful of promises and representations you make to prospective franchisees. If you have previously promised something, then it may be unreasonable for you to then refuse to reflect that promise within the franchise agreement.

Maintaining uniformity

Franchise agreements are inherently drafted in the franchisor’s favour because you have established a successful business model that you have chosen to replicate through franchising. A franchise model’s benchmark of success is uniformity and consistency of quality and standards. Consider whether it’s in your brand’s best interests for one franchisee to operate differently to other franchisees.

From an administration-management point of view, franchisors prefer all franchisees to be on substantially the same contractual terms. If each franchisee has a franchise agreement tailored with different provisions, you can easily lose track of what rules each franchisee must follow. Uniformity removes the need for checking the particular agreement each time you answer a franchisee’s question.

Good faith obligations

The Franchising Code of Conduct requires the parties to a franchise agreement to act in good faith towards each other. This includes during negotiations. You must therefore act reasonably when considering an amendment request.

Importantly, good faith doesn’t prevent a party from acting in their own legitimate business interests. If you have a legitimate commercial reason for not agreeing to a particular amendment, then you are not necessarily acting in bad faith.

Remember that if you grant a concession to one franchisee but not another, you could be accused of failing to treat your franchisees equally. Giving an exclusive territory to one franchisee but not another in the same circumstances can easily lead to accusations you are acting unconscionably.

Unfair contract terms

Under the Australian Consumer Law, contracts entered into or renewed from 12 November 2016 will be subject to the ACL’s unfair contract term protections if that contract meets the ACL’s criteria of a consumer or small business contract. The criteria are strict and whether the protections apply will depend on the circumstances.

If the criteria for a consumer or small business contract are satisfied, then a court could find a particular provision in a franchise agreement to be unfair and unenforceable if it:

• would cause a significant imbalance in the parties’ rights and obligations arising under the agreement;
• is not reasonably necessary to protect the legitimate interests of the stronger party who would be advantaged by the term; and
• would cause detriment to the weaker party if applied or relied upon.

A provision in a franchise agreement which satisfies these criteria and is not necessary to protect your legitimate commercial interests has the potential to be unenforceable. If you have not already done so, you should carefully review your template franchise agreement.

Importantly however, if the franchise agreement meets the criteria for a consumer or small business contract, but if the franchisee has had the ability to genuinely negotiate the agreement, the franchisee’s future ability to argue unfairness is reduced.

Takeaways

Always be mindful of the legal reasons behind many provisions in a franchise agreement. Carefully consult with your lawyer before committing to any change to avoid unintended consequences.

Whether or not you’re a new or established franchise system, franchisors must weigh up whether a request to negotiate is justifiable and reasonable against the protection of your system, and the enforceability of the provision in the future.

 

By Luke McKavanagh, Rouse Lawyers 

This article was previously published on the Inside Franchise Business website.

The post Should your Franchise Agreement be Negotiable? appeared first on Rouse Lawyers.