The New Franchising Code of Conduct

Item

Overview

Application of the new Code

The new Code (with some limited exceptions) will apply to:

• all franchise agreements entered into, transferred, renewed or extended on or after 1 April 2025; and
• conduct engaged in on or after 1 April 2025 in relation to those agreements.

Application of the old Code

The old Code will continue to apply to:

• all franchise agreements entered into before 1 April 2025 until they are terminated, transferred, renewed or extended; and
• conduct relating to those agreements that is engaged in on or after 1 April 2025.

Transitional provisions

New sections 43 and 44 of the Code will only apply to franchise agreements entered into, transferred, renewed or extended from 1 November 2025, allowing time for franchisors to adjust to the new requirements.

A specific purpose fund that is not a marketing or cooperative fund is exempt the requirements in section 31 of the new Code (requiring a franchisor to provide financial statements) and section 61 (dealing with payments to and from a specific purpose fund) until 1 November 2025. This allows franchisors of specific purpose funds to have additional time to transition to the new arrangements.

However, franchisors with marketing or cooperative funds must still meet existing obligations by the deadlines under the old Code. Accordingly, a franchisor may comply with the old Code or the new Code from 1 April 2025 to 31 October 2025. From 1 November 2025, franchisors must comply with the new Code in relation to all kinds of specific purpose funds.

Updates to disclosure documents

Disclosure documents given to franchisees from 1 April 2025 will need to comply with the new Code. However, a new disclosure document created before 1 November 2025 does not need to include the following details:

• The information in item 15 in relation to a specific purpose fund that is not a marketing fund or other cooperative fund.
• The information in item 14 dealing with new requirements relating to significant capital expenditure.

The above exemption applies only to new disclosure documents. Therefore, annually updated disclosure documents (within 4 months after the franchisor’s financial year) or updated disclosure documents by request of a franchisee, must include the new information.

If a disclosure document is given to a franchisee by 31 March 2025 (for franchise agreements to be entered into, transferred, renewed, or extended on or after 1 April 2025), the franchisor does not need to update it immediately on 1 April 2025 and the disclosure document will still be compliant until 31 October 2025.

Item

Overview

Structure of the Code

The new Code has undergone a significant structural change, in that ‘clauses’ have now become ‘sections’ and have been re-numbered.

Changes to disclosure requirements

Additional disclosure needs to be made under the new Code, including with respect to the following:

• Proceedings against a responsible franchisor entity or holding company under certain provisions in the Fair Work legislation.
• Specific purpose funds (instead of only marketing funds) from 1 November 2025.
• From 1 November 2025, the rationale, amount, timing, nature, outcomes, benefits, and risks of any significant capital expenditure that may be required of the franchisee. Although the required information has not changed significantly, the new Code does require additional information in relation to significant capital expenditure to provide greater transparency between a franchisor and franchisee.
• The ‘contact details’ required of a former franchisee now requires inclusion of a telephone number and email address.
• Information that was previously included in the Key Facts Sheet but will now be required to be included in the disclosure document instead. This will require information about whether the franchisee could face competition from businesses not associated with the franchisor in relation to the territory for the franchise.

Franchisors are no longer required to provide a Key Facts Sheet from 1 April 2025.

In certain circumstances, existing franchisees can now opt out in writing from receiving a:

• new disclosure document and a copy of the Code before entering into a new franchise agreement; or
• 14-day cooling-off period after signing a renewed franchise agreement.

Franchise agreement must provide for compensation for early termination (s43)

A franchisor must not enter a franchise agreement unless it includes 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.

A franchisor must not enter a franchise agreement unless it:

• specifies how the compensation is to be determined, with specific reference to lost profit from direct and indirect revenue, unamortised capital expenditure requested by the franchisor, loss of opportunity in selling established goodwill and costs of winding up the franchised business; and
• includes provision for the franchisor to buy back or compensate the franchisee in relation to:

• all outstanding stock of the franchise purchased by the franchisee, where those things were specified by the franchisor and required in order to operate that franchise in accordance with the franchise agreement or any operations manual; and
• all essential specialty equipment, branded product or merchandise purchased by the franchisee that was specified by the franchisor and required in order to operate the franchise, in accordance with the franchise agreement or any operations manual, that could not be repurposed for a similar business.

Franchise agreement must provide reasonable opportunity for return on franchisee’s investment (s44)

Franchisees must have a reasonable opportunity to make a return on any investment required by the franchisor as part of entering into, or under, a franchise agreement. Franchisors must not enter into a franchise agreement unless it provides for this.

What is considered a ‘reasonable opportunity’ would be specific to the terms of each franchise agreement, the costs paid by the franchisee and the length of the agreement. As such, franchisors now need to turn their mind to ensuring that the capital investment needed to establish the franchised business can be feasibly recovered during the term of the franchise agreement.

However, franchisors are not expected to provide a contractual guarantee of a profit or the success of the business. It is not intended to remove the inherent risks of running a business but is intended to ensure that the term of a franchise agreement is consistent with the level of investment required.

Specific purpose funds

Previously, when franchisees were required to pay a fee to a franchisor for a specific purpose (such as marketing, advertising, funding technology updates etc.) they were known as marketing funds or cooperative funds.

To improve clarity, the new Code introduces the new all-encompassing term ‘specific purpose fund’ and the obligations under the new Code apply, regardless of what the money is used for, so long as it is for a specified common purpose relating to the operation of the franchised business.

Financial statements for a specific purpose fund must include meaningful information about sources of income and expenses, particularly regarding the specified common purpose. The financial statement must include the percentage of total income spent on expenses listed in the disclosure document, legitimate expenses for the specified purposes or expenses approved by a majority of contributing franchisees and expenses relating to reasonable costs of administering and auditing the fund. Broadly, the principle is that if a franchisee must contribute money to a fund, they should be told meaningful information about how it is used and whether they see personal benefit from it.

Disclosure of materially relevant facts

Requires a franchisor to provide a franchisee or prospective franchisee with materially relevant facts that are not included in the disclosure document and includes the following new/altered/significant matters:

• If an updated financial document is made or comes into existence (such as a statement of the franchisor’s solvency) and it is not reflected in, or not provided together with, a disclosure document that has been updated, then the franchisor must give a copy of the financial document to the prospective franchisee or franchisee as soon as reasonably practicable, and in relation to a prospective franchisee, before the franchise agreement is entered into.
• Disclose any proceedings by a public agency or a judgement against a franchisor where there is an alleged contravention of certain provisions in the Fair Work legislation.

End of term arrangements

Under the old Code, a franchisor only had the obligation to notify a franchisee whether they intend to extend the franchise agreement or enter into a new agreement at least 6 months before the end of the agreement.

The new Code extends this to also requiring a franchisor to notify the franchisee in writing if the franchisor does not intend to extend the agreement nor enter into a new franchise agreement.

Termination on short notice

The old Code allows franchisors to terminate a franchise agreement with 7 days’ notice. This is permitted only in particular circumstances prescribed by the Code involving misconduct or serious offences.

The circumstances have been expanded by the new Code to include the franchisee:

• Having been found by a Court to have committed a serious contravention of the Fair Work legislation; and
• being liable to a civil penalty or has been convicted of an offence in relation to migration legislation.

In addition, Franchisors now have an easier pathway to termination where there has been a serious breach by the franchisee and the franchise relationship would be unable to continue due to a decision made by another independent body. Franchisees right to dispute the termination (by invoking the dispute resolution process in the Code) has been removed in relation to certain events (include the abovementioned) on the basis that they would have been entitled to appeal the finding as part of a process external to the Code.

Restraint of trade clauses

Previously, if a franchise agreement included a restraint clause, and the conditions under the Code were met, the restraint would be of no effect.

The new Code now expressly prohibits a franchisor from entering into a franchise agreement that includes a restraint of trade clause that breaches the relevant provisions in the new Code. The new Code has also clarified that the provisions only apply in cases where the existing agreement includes an option for a further term.

Franchisor’s costs

A franchisor can require a franchisee to make a payment of a fixed amount prior to the franchisee starting the franchised business if the franchise agreement:

• specifies the fixed amount of dollars;
• specifies that the amount will be for the purpose of paying the franchisor’s legal costs associated with preparing, negotiating or executing the agreement;
• does not exceed reasonable and genuine costs; and
• specifies that the amount will not include any legal costs for the franchisor after the agreement is entered into, relating to preparing, negotiating or executing other documents.

The new Code also provides that a franchisor must not require a franchisee to pay costs incurred by the franchisor in relation to settling a dispute, however it is not intended to cover situations where both parties agree on costs for situations outside of the franchise agreement.

Franchisor signing during the consideration period

The new Code makes clear that a franchisor must not execute a franchise agreement (that is, to enter, renew or extend an agreement) with a prospective franchisee before the end of a 14 day consideration period (previously known as the disclosure period).

Independent advice

The new Code makes clear that a franchisee’s advisors do not have to sign a Code certificate. Instead, a franchisee can itself sign a certificate to confirm that it has obtained advice from a particular advisor, without that advisor also signing.

Disclosure of personal information of former franchisees

Under the new Code, Franchisors must not disclose a former franchisee’s personal information to a prospective franchisee, unless at least 14 days before doing so the franchisor has informed the former franchisee, in writing, of the former franchisee’s right to make a written request that their information not be disclosed, and the former franchisee has not made such a request.

Record keeping

The new Code clarifies that all documents required to be provided to franchisees under the Code must be kept for 6 years.

Australian Small Business and Family Enterprise Ombudsman (ASBFEO)

ASBFEO may now publicise the names of franchisors that refuse to engage in or withdraw from the ADR process. This is intended to encourage franchisors to meaningfully participate in the ADR process.

A franchisor’s conduct occurring on or after 1 April 2025 (in relation to a franchise agreement entered into, transferred, renewed or extended on or after 1 January 2015) may be publicised by the ASBFEO.

Increased penalties

Several sections in the new Code now invoke civil penalties for non-compliance up to 600 penalty units (currently $198,000 for each infringement). Under the old Code, only a handful of clauses were civil penalty provisions.

In addition, there is now a maximum pecuniary penalty that applies for contraventions of certain civil penalty provisions (considered to be the most serious of contraventions). The potential penalty a Court could impose is the greater of $10 million, or if the Court can determine the value of the benefit, 3 times that value or if the Court cannot determine the value of the benefit, 10% of the adjusted turnover for the past 12 months.