When Does the Cooling-Off Period Not Apply?

Simply because you and the franchisor have signed a franchise agreement does not mean you cannot renege on the contract. Per the Franchising Code of Conduct (the Code), you, as the franchisee, have ‘cooling-off rights’. Your cooling-off rights allow you to exit the franchise agreement, even once you have signed the agreement. As such, your cooling-off rights provide you with a safety net. You, as a franchisee, should be aware of your cooling-off rights under the Code. Recent amendments to the Code have expanded the scope of when your cooling-off rights will apply. This article will explain what is the cooling-off period. Likewise, this article will cover when you have the right to terminate your franchise agreement.

What Is the Cooling-Off Period? 

The Code gives franchisees the right to terminate the franchise agreement during the cooling-off period. Prior to the July 2021 amendments to the Code, the cooling-off period was seven days. However, it now lasts for fourteen days from the earlier of the date the franchisee:

• signed the agreement; or
• made the first payment under the franchise agreement.

However, the cooling-off period will not apply in the following two circumstances.

1. Renewal of Franchise Agreement

You may need to renew a franchise agreement when the agreed term is close to its expiration date. Upon renewal, you will enter into a renewal franchise agreement which may be on different terms to your initial agreement. Notably, once you have signed the agreement for the renewal term, there is no cooling-off period. This applies even if you have changed your mind afterwards. Likewise, if you agree to extend the term of your existing franchise agreement (other than by agreeing to renew your agreement), there will be no cooling-off period.

2. Signing of a Renegotiated Agreement

The terms of franchise agreement are not always set in stone, even after you have initially signed them. The parties may agree to vary or update certain key terms, such as the length of the contractual term or its scope, by entering into a deed of variation. As part of this process you may need to sign an updated copy of the franchise agreement when you and the franchisor have agreed on the amendments to be made. However, although this process may involve you signing what could effectively be a new franchise agreement (depending on the amount of variations), when you sign this new agreement for the same business, no cooling-off period applies.

Transfer of Franchise Agreement

As a franchisee you may wish to sell your business, in doing so your interests under the signed agreement will need to be transferred to the incoming purchaser so that they can carry on the business as the new franchisee. This process will either involve an assignment or novation wherein the incoming franchisee enters into the existing franchise agreement or else the incoming franchisee will enter into a new franchise agreement with the franchisor. 

Prior to the amendments to the Code, there was no cooling-off period when you were selling your franchise to an incoming purchaser. However, the insertion of a new clause 26A means that when an existing franchise is transferred to a new franchisee, they will have a cooling off period being the earlier of:

• 14 days starting from the day after they become the franchisee for the purposes of the franchise agreement (which will usually be termed the Commencement Date); or
• the period ending on the date that they take possession and control of the franchised business

During the above periods, the franchisee can terminate the transfer agreement with the outgoing franchisee and cease the process of becoming the franchisee. As a franchisee looking to sell your franchise you should be aware that if this happens you may become the franchisee again, depending on the terms of the transfer and any surrender documentation. It is also important to note that this cooling off-period will only apply where the franchise agreement was entered into, extended or renewed after 1 July 2021.

Key Takeaways

As a franchisee you should be aware of your cooling off rights after entering into a franchise agreement. There are many reasons why you may decide that going ahead as a franchisee is not for you, and if you do decide then you need to know your rights and how long you have to exercise them. The 14-day cooling-off period will specifically not apply where:

1. you are renewing your franchise agreement; or
2. you are varying the terms or scope of your existing agreement.

However, if you are buying or selling an existing franchise it is important to be aware that the cooling-off period will apply to this transfer.

In general, you should not enter into any franchise agreement without first seeking legal advice from a franchise lawyer. However, if after signing your agreement you no longer wish to proceed, you should be aware of any rights you may have under the Code, including the cooling-off period.  If you need any assistance with understanding your cooling-off rights as a franchisee, contact our experienced franchise lawyers 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.