Updates to the Franchising Code of Conduct – 1 April 2025
Following a review of franchising law in Australia, a new Franchising Code of Conduct will come into effect on 1 April 2025 (with some transitional arrangements to apply from 1 November 2025).
Both franchisors and franchisees need to be aware of these changes.
Summary of Changes
The amendments to the Code are extensive. Because of the scope of the changes, this article will not be able to discuss all of the updates, however there are some items that give an insight into the spirit of these amendments.
Reasonable Opportunity to Realise a Return
One change is that franchisees must have “a reasonable opportunity to make a return on their investment” during the term of their franchise agreement.
When entering into a new franchise, franchisees will generally need to make considerable upfront capital investments. Accordingly, penalties may apply to a franchisor if the commercial terms of a franchise agreement are such that a franchisee cannot realistically hope to recover their capital investment during the term of the agreement.
It is important to understand the content of this obligation. Franchisors need to ensure it is feasible that a franchisee can realise a return. It is not an obligation to guarantee that the franchisee’s investment will be profitable or free from risk.
Compensation for early termination and stock buy-back
Franchisors will also need to compensate franchisees for early termination of a franchise as a result of the franchisor closing its franchise network or exiting Australia.
Compensation arrangements will need to consider foregone profits, wasted capital and stock, lost goodwill and winding-up costs. Franchise Agreements will need to include buy-back provisions for stock, branded equipment and similar items if the agreement is not renewed.
Restraints of Trade
Franchise agreements will not be allowed to include post-termination restraints to purport to operate where a franchisee wishes to extend the franchise, it is not in breach of the agreement and the franchisor nonetheless refuses to extend the agreement (with no compensation to the franchisee for goodwill).
A franchise agreement may not include a restraint that operates in such circumstances, nor can the franchisor enforce such a restraint.
Commencement
The majority of franchising changes will apply from 1 April. The new Code will apply to franchise agreements entered into, transferred or extended after that date.
The old Code will continue to apply to existing franchise agreements until they are terminated, transferred or renewed, at which point they will be subject to the new Code.
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