News & Insights

Following the release of the exposure draft, the Franchising Code of Conduct (Code) is now legislation and will come into effect on 1 April 2025. The Code has been remade in its entirety given the recommendations that were proposed to the Government, and the previous Code sunsetting.

When will the new Franchising Code of Conduct apply?

With limited exceptions, the changes are set to apply to franchise agreements that will commence after 1 April 2025.

This means that if you are providing Disclosure Documents for a franchise agreement that will commence after 1 April 2025, then the Disclosure Document will need to be compliant with the new Code.

What has changed within the Franchising Code of Conduct?

Whilst there are minor changes, such as the reference to “sections” rather than “clauses”, there are more substantial changes that do not have an equivalent in the previous Code.

Our franchising industry group has highlighted some of the more glaring changes that will have a direct impact on Franchisors.

Maximum civil penalty under the code

The maximum civil penalty that may be prescribed under the Code has been split into a two-tiered system with the maximum penalty being at least $10million, and the lower penalty being at least 600 penalty units (currently $198,000).

Relevant sections:

• Section 11 – Civil Penalty Provisions of the Code and
• Section 17- Amount of Civil Penalty for Certain Contraventions by Bodies Corporate

Reviews of the Code

The Code will be reviewed again before 1 April 2030 to assess the role, impact and operation of the regulations.

Relevant sections:

• Section 12 – Reviews

Disclosure document: Franchisee undertaking significant capital expenditure

Whilst previously included, it has now been made clearer, that in addition to the requirements already imposed on franchisors in relation to Disclosure Documents, franchisors will now be required to include additional information about whether a franchisor will require the franchisee to undertake significant capital expenditure, including the justification for the expenditure, within the Disclosure Document.

Relevant sections:

• Section 20 – Franchisors Must Create a Disclosure Document and
• Section 47 – Discussion About Significant Capital Expenditure Disclosed in Disclosure Document

Opt-out provision for Disclosure Documents and Key Fact Sheet removed

An opt-out provision for Disclosure Documents has been included for franchisees, under certain circumstances. However, this should be carefully considered prior to agreeing as it will be narrow and will present risks to franchisors.

The Key Facts Sheet has now been removed and additional information will be included in the Disclosure Document.

Relevant sections:

• Section 23 and Section 24 – Entering into, Renewing, Extending and Transferring Franchise Agreements
• Key Fact Sheet

Specific purpose funds

Whilst the content is similar to that of the previous Code’s clause 15, there is no longer the use of “marketing funds”. There is now a general term “specific purpose funds” to capture any monies to be used for a specified purpose under the franchise agreement.

Relevant sections:

• Section 31 – Financial Statements for Specific Purpose Funds

Restraint of trade

A Franchisor will be prohibited from entering into a franchise agreement that includes a restraint of trade that would apply if the agreement expired, contained an option to renew, where there is no breach of the agreement, and under other various circumstances.

Relebvent sections:

• Section 42 – Restraint of Trade Clause if Franchise Agreement is not Renewed or Extended and
• Section 67 – Franchisor Not to Rely on Restraint of Trade Clause If Franchise Agreement Not Renewed or Extended

Franchise agreement to provide compensation for early termination

A franchisor will not be able to enter into a franchise agreement unless it includes a provision for the franchisee to be compensated for early termination of the agreement in circumstances where the franchisor withdraws from the Australian market, rationalises its networks in Australia, or changes its distribution models in Australia.

Relevant sections:

• Section 43 – Franchise Agreement Must Provide for Compensation for Early Termination – General

Reasonable opportunity for return on franchisee’s investment

Franchisees must have a reasonable opportunity to make a return on investment required by the franchisor as part of entering into, or under, a franchise agreement.

Relevant sections:

• Section 44 – Franchise Agreement Must Provide Reasonable Opportunity for Return on Franchisee’s Investment – General

No requiring franchisee to pay legal costs

A franchisor must not request a franchisee to pay all or part of its legal costs in preparing, negotiating, or executing the franchise agreement, except under certain circumstances.

Relevant sections:

Section 65 – Franchisor Not Require Franchisee to Pay Franchisor’s Legal Costs Relating to Franchise Agreement

No requiring franchisee to pay costs for settling dispute

A franchisor must not request a franchisee to pay costs incurred by the franchisor in relation to settling a dispute.

Relevant sections:

• Section 66 – Franchisor Not to Require Franchisee to Pay Costs of Settling Disputes

ADR Process

In addition to the previous ADR processes outlined in the Code, the ombudsman may publicise the names of franchisors that refuse to engage or withdraw from the ADR process.

Relevant sections:

• Section 78 – ADR Process

What should Franchisors do now?

In preparation for the incoming changes, franchisors should:

• Start updating Disclosure Documents for use after April 2025.
• Start updating Franchise Agreements for use after April 2025.

It’s important to get things right in the first instance. Contact our Franchising team to seek advice around any areas which you do not understand or require clarification on.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.