The Franchising Code of Conduct (the Code) allows all new franchisees an opportunity to exit out of a franchise agreement. Franchisees can exercise their rights under the cooling-off period within seven days of:
- signing the franchise agreement; or
- making the first payment under the agreement.
The cooling-off period is an important safety net and should be utilised when necessary. This said, it is vital that prospective franchisees undertake due diligence and do not rely entirely on the cooling-off period for protection. This article will describe cooling-off periods in franchise agreements.
When Will the Cooling-Off Period Apply?
The cooling-off period will last for seven days from the date you first:
- signed the franchise agreement; or
- made the first payment.
The cooling-off period provides an excellent opportunity to ensure that you have made the right decision and have properly reviewed all of the relevant information provided to you, such as the business financials and the franchise agreement.
It is important to remember that the cooling-off period will only apply to new franchisees and not to the renewal, extension or transfer of an existing franchise.
What Expenses Can You Recover?
Under the Code, a franchisee is entitled to recover any money that was paid under the franchise agreement within two weeks of providing the cooling-off notice. Some expenses that you may be entitled to recover include:
- legal costs paid to solicitors or accountants for advice about the franchise;
- money paid to set up an appropriate business structure;
- business name and number registration fees;
- fit-out costs at the proposed franchise site;
- purchase or hire of equipment;
- financing fees;
- franchise membership fees;
- any marketing for the franchise business;
- money spent on stock; and
- staff uniforms.
It is important to note that not all of the money you have paid will be recoverable. This is because 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.
Furthermore, if you signed a lease agreement at the same time as the franchise agreement, you may be financially liable for the lease if it does not provide a cooling-off period.
Relying on the cooling-off period should be avoided where possible, as you may not be in the same financial position you would have been if you had not entered into the franchise in the first place. Take the time to consider whether the franchise is the right choice for you and seek legal advice on the franchise agreement before signing it.
Complying With the Franchise Agreement
Once you have exercised your cooling-off right, you will still need to adhere to the termination clause of your franchise agreement. In other words, using your cooling-off right will not end all legal obligations under the agreement.
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 which 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.
The cooling-off period provides potential franchisees with the opportunity to end a franchise agreement for various reasons. The right is a useful safety net for franchisees, but should not be their sole protection. As a prospective franchisee, you should:
- research the franchise;
- ensure that you are willing and able to operate the franchise; and
- approach the franchise agreement seriously and without the intention of exercising the cooling-off right.
This said, if you find yourself in a situation which makes it necessary to exit the agreement, you should exercise your right to use the cooling-off period. If you have any questions, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.
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