In NSW, a cooling-off period is a grace period that allows a party to reconsider the contract and its obligations they have entered into and exit the arrangement if it wishes. However, cooling-off periods do not automatically apply to all contractual arrangements and those that do, come with strict rules. Before you rely on a cooling-off period, you should familiarise yourself with these rules.
When Will a Cooling Off Period Apply?
Purchasing Property
Cooling-off periods are common when purchasing property. It is also generally only available for buyers, not sellers. In NSW, residential property purchasers have a 5 business day cooling-off period after an exchange of contracts until 5pm on the fifth business day following the exchange. If you purchase a property off the plan, you will have the benefit of a 10 business day cooling-off period. This longer period reflects the complexity and length of these purchase contracts.
In New South Wales, a cooling-off period will not apply to:
- property purchases at auction;
- property purchases where parties exchange contracts on the same day the property is auctioned for sale;
- vacant or developed land used exclusively for nonresidential purposes; and
- properties larger than 2.5 hectares in area.
A cooling-off period after buying or selling property in NSW can be waived if the purchaser’s solicitor issues a section 66W certificate. However, cooling-off periods exist for the purchasers’ benefit, so the buyer should give careful consideration before agreeing to waive these.
Franchising Agreements
New franchisees are usually entitled to a weeklong cooling-off period after signing a franchise agreement.
The cooling-off period will last for seven days from the date you first:
- signed the franchise agreement; or
- made the first payment.
The benefit of the cooling-off period only applies to new franchisees and not to:
- renewals;
- extensions; or
- transfers of existing franchises.
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What Costs Will I Get Back?
Although an early exit is better than a late one, you should know that after implementing a cooling-off provision, you will almost always be in a worse financial position than if you had never entered the agreement in the first place.
Property Purchases
In NSW, if you withdraw from a residential property contract during a cooling-off period, you will have to pay 0.25% of the purchase price to the vendor. If you already paid a deposit, this cost may be taken from that before you are reimbursed for the remainder. If there is no deposit or if the 0.25% cooling-off cost exceeds the deposit, the vendor can take legal action to pursue the money as a liquidated debt.
Franchising Agreements
Under the Franchising Code of Conduct, a new franchisee who exercises their cooling off rights within the one-week period will be refunded any money paid to the franchisor less the franchisor’s ‘reasonable expenses’, which the franchisor is entitled to retain. The reasonable expenses might be substantial, particularly when training has taken place before the franchisee took advantage of the cooling off right to rescind. As such, you might not be refunded the total amount.
Furthermore, once you have entered into the agreement, additional expenses will probably have been paid to the franchisor. These may include any of the following:
- any costs paid to franchise solicitors or accountants in seeking advice about the legality of the franchise documents;
- any monies paid in establishing the appropriate business structure (company, trust, partnership etc.) and setting up means to protect assets;
- expenses for ABN or business name registration, or registration with any organisation to which the franchisor requires you to become a member;
- any expenditures on renovating or fitting out the premises of the proposed site of the franchise;
- any money spent on marketing for the business (print materials, proper signage, online promotional campaigns etc.);
- equipment purchase or hire expenses;
- any fees incurred in being financed by a bank;
- money spent on stock; and
- anything spent on staff uniforms/clothing.
The Code also allows the franchisor to retain certain costs which they have reasonably incurred. These reasonable costs should be set out in the franchise agreement and disclosure document and will usually include the franchisor’s legal expenses or any training costs.
Continue reading this article below the formWhat Are My Legal Obligations?
Property Purchases
If you intend to exercise your cooling-off rights, you should notify your vendor in writing before the applicable deadline.
Franchising Agreements
Even after you terminate the franchise agreement following a cooling-off period, some of the legal obligations under the initial agreement may continue for some time. Some of the provisions in the agreement that continue to apply, despite ending the franchise agreement, include things like:
- restraint of trade clauses;
- uses of trademarks; and
- other restrictions on the use of confidential information or trade secrets to which the company has rights.
Typically, the franchisor will monitor the termination process and ensure that the franchisee does the following:
- returns any manuals and intellectual property (IP) to the franchisor;
- transfers the business name to the franchisor;
- removes any signage or marketing material that contains the IP of the franchisor;
- complies with any restraints of trade; and
- complies with any other termination requirements set out under the franchise agreement.
What About Other Types of Contracts?
Most commercial contracts do not include cooling-off provisions. In most commercial contracts, both parties intend it to be legally binding and enforceable as soon as they enter it. If you wish to include a cooling-off period in your contract, you should set out the parameters of the cooling-off period. This includes the timeframe and any penalty costs that apply, and you should discuss it with your lawyer.
Key Takeaways
Cooling-off periods are a good safety net to get out of a property or new franchise agreement if circumstances change or you simply change your mind. However, they shouldn’t be blindly relied on. Before signing, you should always thoroughly read any contract you enter and carefully consider your contractual obligations before becoming bound by them.
If you need further advice on cooling-off periods, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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