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Lady Cafe Staff Blog

Franchises are everywhere – from fast-food chains like Subway – to fitness companies like Anytime Fitness. Franchises are understandably enticing because you are purchasing rights in a company which has already built up a solid reputation. However, it is important to understand the implications of a franchise agreement, as franchises come with unique risks that would not be involved if you were to start your own business from scratch.

Key Documents

People who are new to franchising may find franchise agreements and associated documents to be quite daunting. Having a good understanding of these documents, and the rights and obligations they create for the franchisor and franchisee, is crucial to ensure that the franchise runs smoothly.

Key documents include:

Potential risks

As experts in dispute resolution, Slater and Gordon has seen the negative situations that can arise out of franchising. If you are interested in buying a franchise, you should be aware of the following pitfalls:

Being unaware of the 'cooling-off' period

Under the Franchising Code of Conduct, new franchisees have 7 days from signing the franchise agreement or paying a fee (whichever comes first), to consider whether they have made the right decision.

If the franchisee decides within the cooling-off period that they do not wish to proceed with the agreement, the franchisor must refund any money paid to them within 14 days, less money paid for ‘reasonable expenses’.

It is important to note that the cooling-off period does not apply to renewals, extensions or transfers of existing franchises.

Difficulty selling the franchise

If you no longer wish to run your franchise, selling or transferring it to someone else could be more difficult than anticipated. Your franchise agreement may place restrictions the sale or transfer of the franchise, for example:

  • the franchisor may have the right of first refusal meaning the franchisee must first offer to sell the franchise back to the franchisor;
  • the franchisor may retain an assignment fee upon sale or transfer (either a set amount or a percentage of the sale price);
  • the premises and/or equipment may need to be refurbished or upgraded before sale;
  • the buyer may need to meet the franchisor’s selection criteria; or
  • the buyer may need to complete the franchisor’s training program.

'Churning'

According to the Australian Competition and Consumer Commission, churning is:

the repeated selling of a franchise site by a franchisor in circumstances where the franchisor would be reasonably aware that the site is unlikely to be successful, regardless of the individual skills and efforts of the franchisee.

Churning is not expressly prohibited under the Franchising Code of Conduct or the Competition and Consumer Act 2010 (Cth), however there have been instances where a franchisor’s conduct has been found to be misleading and deceptive. For example, a franchisor was found to have engaged in misleading and deceptive conduct by representing that a franchisee could make $5,000 in revenue each month after 210 days if he purchased a $24,000 cleaning franchise [13]. The franchisor did not have reasonable grounds for making the representation because he did not have sufficient volumes of cleaning work to supply the franchisee [14].

Termination

A franchise agreement may allow a franchisor to terminate the agreement even if you have not breached any terms of the agreement. Some franchise agreements do not allow you to recover the amount you paid for the franchise and you are essentially left with nothing.

If the franchisor seeks to terminate the franchise agreement because it alleges that you have breached the franchise agreement, the franchisor is required to provide you with a notice in writing with details of the breach, what is required from you to rectify it and a reasonable timeframe to rectify the breach. If you do not rectify the breach within this timeframe, the franchise agreement may then be terminated by the franchisor.

Please note that in cases of extreme breaches, the franchisor is not required to give you this notice, including but not limited to situations where the company is insolvent, you are convicted of a serious offence or you operate the business in a way that endangers public health or safety.

Assistance from the franchisor

Even though it is in a franchisor’s interests to assist you with successfully running your franchise, franchisors are not always forthcoming with assistance. Further, the franchisor may be able to compete with you with other franchises owned by franchisor or by online trading. This can result in you struggling to maintain the franchise and can cause your franchise to fail, meaning that the franchise agreement may be terminated and you will be unable to recover any amounts from the franchisor for your loss.

How we can help you

Slater and Gordon can help you by:

  • Helping you to understanding your franchise agreement or lease
  • Providing you with advice about your rights and obligations as a franchisee in a company
  • Assisting you to negotiate a resolution regarding an existing franchising dispute
  • Representing you in any legal proceedings relating to a franchising dispute

Learn more about our dispute resolution services, or if you have an enquiry about a franchising dispute, submit an enquiry online.


[1] Franchising Code of Conduct s 5.
[2] Ibid s 9.
[3] Ibid annexure 1, cl 4.
[4] Ibid annexure 1, cl 8.
[5] Ibid annexure 1, cl 14.
[6] Ibid annexure 1, cl 21.1.
[7] Ibid s 3(1).
[8] Competition and Consumer (Industry Codes—Horticulture) Regulations 2017.
[9] Franchising Code of Conduct s 3(2)(a).
[10] Ibid s 3(2)(b).
[11] Ibid s 11.
[12] Australian Competition and Consumer Commission, Franchising Agreements, <https://www.accc.gov.au/business/industry-codes/franchising-code-of-conduct/franchising-agreements/>.
[13] Australian Competition and Consumer Commission v South East Melbourne Cleaning Pty Ltd (In Liq) (Formerly Known as Coverall Cleaning Concepts South East Melbourne Pty Ltd) (No 2) [2015] FCA 257, [4].
[14] Ibid [19].

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