In Short
- Compliance is Key: Franchise agreements must comply with the Franchising Code of Conduct, Australian Consumer Law, and equity principles.
- Flexibility Matters: Draft agreements to adapt to market changes and growth while maintaining fairness and transparency.
- Define Key Terms: Clearly outline operational standards, fees, renewal terms, and territories to avoid disputes and ensure clarity.
Tips for Businesses
Build flexibility into your franchise agreement to future-proof your business and accommodate growth. Ensure all fees, operational standards, and key terms are documented clearly to avoid misunderstandings. Always consult a franchise solicitor to review your agreement for legal compliance and fairness to protect both parties’ interests.
Drafting a franchise agreement is crucial in establishing a successful franchise network. The Franchising Code of Conduct provides a regulatory framework for these agreements. However, the franchisor determines the specific terms within the limits of Australian Consumer Law and equity principles. A well-crafted agreement balances compliance, fostering strong, transparent relationships between franchisors and franchisees. This article explores the key considerations and legal requirements when drafting a franchise agreement.
Franchising Code of Conduct
Every franchise agreement must adhere to the Franchising Code of Conduct (the Code). This outlines the rights and responsibilities of both the franchisor and the franchisee.
The Code requires franchisors to meet specific disclosure obligations and outlines the parameters of the cooling-off period, ensuring transparency and fairness. Additionally, the broader Australian Consumer Law (ACL) and general principles of equity govern franchise agreements. These provide further legal protections. A franchisor must carefully draft the agreement to align with these regulations. This approach ensures compliance and fosters a fair and transparent relationship with your franchisees.
When bringing on board new franchisees, it is important to negotiate agreements that strike a balance. This factsheet explains how.
Draft the Franchise Agreement Flexibly
Franchise agreements generally span 5 years or longer. Therefore, it is crucial to get them right at the start. As a franchisor, you cannot predict the future, so it is essential to draft flexible agreements. It is important to remember that under section 21 of the ACL, unconscionable business conduct is prohibited. This regulation protects franchisees in a weaker bargaining position, ensuring they are not unfairly disadvantaged.
When drafting your franchise agreement, it is recommended that you include provisions that allow for necessary adjustments while maintaining fairness and transparency with your franchisees. This flexible approach can help ensure your franchise model’s success and adaptability. This can also help with any future expansion plans that you may have for your network. It’s advisable to consult with a franchise solicitor to safeguard both your interests and those of your franchisees.
Here are a few fundamental clauses that should be drafted effectively:
1. The Operations Manual
The Operations Manual should serve as a comprehensive guide to the operational aspects of running the franchise, including:
- fit-out requirements;
- training protocols; and
- day-to-day procedures.
This document plays a significant role in ensuring consistency and quality across your franchise network.
It is important to note that any changes that are material to the rights and obligations of the franchisee must be addressed directly in the franchise agreement, not through the operations manual. The manual should clearly outline operational standards and costs, but it should not be used to modify or override terms stipulated in the agreement.
By keeping the operations manual focused on practical and procedural details and ensuring that all material terms are included in the franchise agreement, you can maintain a consistent and transparent relationship with your franchisees. This strategy helps to safeguard both your interests and those of the franchisee while ensuring that the operational standards are communicated network-wide.
2. ‘Term’ and ‘Renewal’
In franchising, it is essential to understand that there is no automatic right to renew a franchise agreement. The decision to offer a renewal will largely hinge on the franchisee’s success in growing their business throughout the agreement term. If the franchisee has achieved substantial growth and demonstrated strong performance, you may be more inclined to consider granting a renewal. To incentivise franchisee compliance and growth efforts over the initial term, the franchisor may wish to grant a renewal right. This right to renew is commonly subject to the franchisee meeting any pre-conditions in the agreement.
When renewing a franchise agreement, it is crucial to understand that while terms and conditions may evolve, the renewal should not fundamentally change the agreement to the point where it no longer qualifies as a ‘renewal’. Operational updates, law changes, or Code amendments can lead to necessary revisions. However, the renewal will remain valid as long as the changes are not radically different.
At the same time, if the franchise relationship has not been successful or beneficial for either party, you have the right to allow the agreement to expire and not enter into a renewal agreement. The nature of franchise agreements can vary greatly; newer franchises typically offer shorter and more flexible terms, which might appeal to those entering the market. Conversely, more established franchises can provide longer-term agreements for greater stability. By understanding these dynamics, you can better manage your renewal process and make decisions that align with the overall goals of your franchise system.
3. Prices and Costs
As a franchisor, you must clearly outline all fees associated with becoming a franchisee in the agreement and disclosure document. Specify the purpose of each fee and the timings of payments.
It’s crucial to build flexibility into your agreement so that the payments can adapt to market conditions and any unforeseen changes. However, unless a franchisee has explicitly agreed to pay additional fees, you may be unable to introduce or change new fees without their consent. This would be considered a unilateral variation, prohibited under unfair contract term legislation.
Similarly, updating the Operations Manual to change fees could be seen as a unilateral variation if it alters a key contractual obligation. Any such changes must be disclosed to franchisees to ensure transparency and compliance. Therefore, it’s imperative to have a franchise solicitor review or draft your agreement.
4. Territory
The territory clause is vital to any franchise agreement and should be drafted carefully. Franchisees commonly seek exclusive rights to their territory or designated location for the duration of the agreement. However, granting exclusivity can hinder your franchise system’s overall growth potential. Demographic trends in an area can change over time, which may necessitate adjustments to the territory.
As the territory is an essential clause of the agreement and must be clearly defined before agreeing, the best approach is to draft the clause to allow for changes based on principles or pre-approved objective metrics agreed upon by both parties. By incorporating flexible provisions into the territory clause, you can accommodate future changes without compromising your franchise system’s growth potential or the franchisee’s interests.
Continue reading this article below the formKey Takeaways
Building flexibility into your franchise agreement is essential to accommodate future changes and growth. Clearly defining fundamental terms and allowing for adjustments can help you manage the evolving needs of your franchise system efficiently.
If you need help drafting a franchise agreement that meets all requirements and supports your franchise’s development, our experienced franchise lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Drafting a franchise agreement is critical for establishing a successful franchise network. A well-crafted agreement ensures compliance with legal requirements while fostering strong, transparent relationships between franchisors and franchisees.
Franchise agreements should be flexible to accommodate unforeseen changes, market conditions, and future expansion plans. Flexibility helps maintain fairness, adaptability, and transparency in the franchise relationship.
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