News & Insights

The Federal Government has brought forward by one month the reforms to the Franchising Code of Conduct to redress the power imbalance of new vehicle dealership agreements.

The changes aim to provide new car dealers with greater fairness and equality in commercial arrangements which have historically favoured manufacturers.

The legislative changes now apply to new vehicle dealership agreements entered into or renewed on or after 1 June 2020. The amendments are limited to dealerships that predominantly deal in new passenger vehicles or new light goods vehicles.

The reforms address:

• End of term obligations;
• Capital expenditure disclosure; and
• Access to dispute resolution

end of term obligations

The Franchising Code now requires manufacturers and dealers to provide at least 12 months’ notice period if they intend not to renew an agreement which is at least 12 months or longer. This increases the notice period by six months and affords franchisees greater time to search for a new franchisor, sell the site or re-configure it to other brands it may be operating under. Non-compliance of a franchisor to this notice period may result in a penalty of $63,000.

Manufacturers and dealers must also manage the winding down of an agreement by discussing, planning and agreeing on the end of term arrangements, thereby ensuring a mutually beneficial exit for both parties. The party intending not to renew an agreement must provide a statement to the other, outlining the reasons why. This aims to help dealerships ensure manufacturers are acting under their obligation of good faith.

capital expenditure

The reforms also require manufacturers to provide a greater degree of specificity in their pre-contractual disclosure of significant capital expenditure. This includes specifying as much information as is practicable regarding the amount, timing and nature of the expenditure. While manufacturers don’t have to disclose information or plans they do not then have, they must disclose relevant information at hand. This means franchisors would be required to provide comparative costing regarding the likely costs of an upgrade to a facility.

The Franchiser Code now excludes “necessary” expenditure from the definition of significant capital expenditure. This removes the pressure on dealers to make outlays during their agreement, as deemed “necessary” by the franchisor.

Manufacturers must also discuss the circumstances under which the franchisee is likely to recoup any expenditure, prior to an agreement being signed or renewed.

Ultimately, these capital expenditure requirements provide franchisees with greater transparency in assessing their commercial position.  It does not provide compensation should an agreement end before the full RoI on a refit not been obtained.

dispute resolution

The Government’s changes also permit the use of multi-franchise dispute resolution. This allows franchisees, with similar disputes against the same franchisor, to request that their disputes be dealt with together. Importantly, this may help dealers to leverage their strength in numbers to resolve a potentially systemic problem.

Multi-franchise dispute resolution is available irrespective of when the new vehicle dealership agreement came into effect.

These changes are a good start at facilitating fairer and more open communication. The Government has committed to further discussions on the issue of tenure and a principles-based compensation guide.

If you are interested in how these changes may affect your new vehicle dealership agreement, or would like further information, please contact our commercial (motor dealers) team.

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.