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With COVID-19 lockdowns now in place across Australia, the retail sector has taken a hit. The Government has attempted to mitigate the worst of these effects by introducing the JobKeeper program. Further, the New South Wales (NSW) and Queensland governments have also introduced rent relief programs for commercial tenants. While these initiatives mitigate the devastating effects of lockdowns on Australian retailers, one of the forgotten sectors of the retail market is franchisees. So, what happens to franchise fees and marketing fees during COVID-19? This article explains what we know so far. 

Negotiate With Your Franchisor

The franchise sector is estimated to generate at least $150 billion in annual revenue and is a significant component of Australia’s total retail sector. The Federal Government recently issued a media release relating to the franchising sector. It expressed concern that franchisors were still charging franchisees regular fees despite being unable to operate or suffering from significant income loss. It encouraged franchisors and franchisees to negotiate with each other to deal with the current crisis.

As this is merely a recommendation, franchisees do not have a huge amount of leverage against franchisors. Also, there has not been any clear guidelines released in relation to a franchisee suspending or reducing the fees they normally need to pay to franchisors. Instead, there is the threat of a possible Australian Competition and Consumer Commission (ACCC) investigation should franchisors not be found to have acted in ‘good faith’.

Essentially, this is still a commercial issue, with franchisees needing to reach out to franchisors to:

  • explain their situation; and 
  • seek some reduction in fees payable.

Negotiation Prospects

Franchisors can charge two kinds of fees. These are:

  1. fixed or flat fees that apply to service-related franchises; and
  2. percentage-based fees that are proportional to revenue or income.

Percentage Based Fees

Percentage-based fees automatically reduce in proportion to a reduction in your sales. If you have no sales, you will pay no fees. It is more difficult to argue for your franchisor to completely waive your fees if they have already been reduced simply due to loss of sales. 

If you still face financial difficulty despite this reduction in fees, you could seek financial support in the form or a loan from the franchisor. Again, this would be a matter of commercial negotiation. Your bargaining power to ask for such assistance would depend on the consequences of your business failing for the franchisor. You will need to outline this in your next disclosure document

A disclosure document is a document which summarises information regarding your franchise and its system.

Fixed Fees

Where you pay a fixed fee, you may be on more solid ground for negotiating a fee reduction and waiver. In cases where your revenue has dramatically declined, it may be unfair of franchisors to continue to impose the same fixed fee. 

In these circumstances, you should reach out to the franchisor and explain how difficult the current situation has become. Then, seek a suspension or substantial reduction in the fixed fee you are currently paying.

If the franchisor refuses to reduce the fixed fee, you should reach out to the ACCC or the relevant Small Business Commissioner in your state or territory to see whether they could assist in this negotiation process.

Termination

In the worst case, you may need to consider terminating your franchise agreement if the fees are simply unsustainable and your franchisor is unwilling to reduce them. There are possible grounds to argue that the contract has ended due to no fault of your own. Although this does not mean you can get your investment back, it may mean the franchisor will not be able to enforce your personal guarantee to recover any further money that accrues after the franchise agreement is terminated. 

Key Takeaways

As a franchisee, you may be experiencing difficulties in generating revenue during this uncertain period. If you are facing financial trouble and cannot afford to pay your franchise fees, you should negotiate with your franchisor immediately. For advice on how to approach the negotiation process, contact LegalVision’s COVID-19 Legal Team on 1300 544 755 or fill out the form on this.

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