Franchisors have onerous franchise disclosure obligations. The list is set out in the Franchising Code of Conduct, and it ranges from the business experience of the franchisor to the number of existing franchisees that are currently part of the franchise network. It even requires information regarding the franchisor’s financial standing. These are all set out in a “disclosure document”, and the franchisor needs to provide it to every potential franchisee before they enter a franchise agreement. However, the franchise disclosure obligations do not stop after you have provided the franchisee with the disclosure document. The franchisor also has a duty to disclose information during the term of the franchise agreement. This article will run through five of the disclosure obligations that exist after the franchisor and franchisee have signed the franchise agreement.
1. The Lease
Many franchises need to operate from particular premises. Usually, there is an option for either the franchisor or the franchisee to enter the lease. If the franchisor is a party to the lease, the franchisor will be required to provide the franchisee with a copy of the lease agreement (or an agreement to lease as the case may be). The franchisor will also need to disclose details such as any incentive or financial benefit that the franchisor will obtain as part of this arrangement.
If the franchisor does enter the lease on the franchisee’s behalf, the franchisor will also need to provide a document that gives the franchisee the right to occupy the premises and any details of the conditions of the occupation. This agreement usually comes in the form of a licence deed between the franchisor and franchisee.
2. Yearly Updates and Requests for the Disclosure Documents
The franchisor needs to update the disclosure document on an annual basis. The franchisor also needs to make the updates to the disclosure document within four months after the end of each financial year. This requirement usually means changes to the number of existing franchisees, updates as to the financial information or changes to the operation of the franchise such as whether the franchisor has changed their supply arrangements or marketing fund plans.
There is an exemption to this disclosure requirement if:
- The franchisor has not entered into more than one franchise agreement in the last financial year; and
- The franchisor has no intention of entering into another franchise agreement in the next year.
For the purpose of counting how many franchise agreements the franchisor entered in the last financial year, the franchisor must take into account new franchise grants, transfers and renewals.
Despite the above, franchisors will still need to update their disclosure document if a franchisee requests a copy of it.
3. Materially Relevant Facts
The franchisor has an obligation to disclose to franchisees and prospective franchisees matters that are “materially relevant facts”. These are usually issues that will have an impact on the franchisee’s business and day-to-day operations. The franchisor will be required to disclose these details to a franchisee within a reasonable time. That is, not more than 14 days before becoming aware of the matter. Examples of “materially relevant facts” include:
- Changes in the ownership or control of the franchise or one of its associates;
- Litigation against the franchisor or one of its directors; or
- Changes in ownership of the intellectual property.
4. Marketing Fund
Similar to the financial obligations that a franchisor has in regards to the franchise entity, the franchisor will be required to provide financial information about the marketing fund if one exists. The financial statement should include details of expenses and sources of income. A registered company auditor will need to audit the financial statement unless 75% of the franchisees who contribute to the fund vote against an audit. The franchisor must give a copy of the statement and the auditor’s report within 30 days of preparation of the documents they need to prepare each financial year.
5. Notification At the End of a Term
The Franchising Code of Conduct requires franchisors to provide franchisees with:
- Written notification of the intention to extend the franchise agreement; or
- Written notification of the intention to enter into a new agreement when the term ends.
For franchises that operate for a term longer than 12 months, the franchisor is required to provide this notification at least six months before the end of the duration of the franchise agreement.
The franchisor has franchise disclosure obligations not only at the commencement of the franchise agreement but also throughout the term of the franchisor and franchisee relationship. The franchisor should prepare to disclose such matters of importance to potential and existing franchisees.
If you are a franchisor or a franchisee, and you want to know more about your rights and obligations, get in touch our experienced franchise lawyers on 1300 544 755.
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