When Must Franchisors Return Deposits Paid By Potential Franchisees?

The Franchising Code of Conduct (the Code) is very strict when it comes to Franchisor’s taking a non-refundable payment from a potential franchisee. Clauses 9 and 10 of the Code set out the conditions a franchisor must satisfy in order to keep a non-refundable deposit from a franchisee.

Clauses 9 and 10 of the Code Regarding Deposits

Clauses 9 and 10 of the Code operate concurrently when it comes to a franchisor taking a non-refundable payment. In summary, the two clauses state that a prospective franchisee:

1. be given a copy of the Franchise Agreement (in the form it is to be executed), the Disclosure Document and the Code (collectively the “Franchise Documents”);
2. be provided 14 days to read, understand and obtain advice (or confirm via a written statement they have decided to not obtain such advice) about the Franchise Documents; and
3. provide to the Franchisor a written statement that they have had a reasonable opportunity to read and understand the Disclosure Document and the Code.

Only once all of the above has been complied with, a Franchisor may take a non-refundable payment from a prospective franchisee.

Information Statement

A prospective franchisee must also be provided a copy of an “Information Statement” in the form set out in the Code. This Information Statement should have been provided to the prospective franchisee as soon as practicable after the prospective franchisee completes an application form or expresses interest in becoming a franchisee.

Clause 10 Exceptions

Clause 10 provides a small exception in two circumstances before a franchisor can take a non-refundable payment. The exception is the need for the Franchisor to obtain from a prospective franchisee statements they have obtained advice on the franchise agreement if the Franchise Agreement to be entered into is:

1. a renewal; or
2. an extension of the term or scope.

In most cases where a Franchise Agreement is renewed or the term or scope is extended, franchisors will require a prospective franchisee to enter into a new franchise agreement. Accordingly, the above conditions will apply.

Disclosures Required in the Disclosure Document

Item 14.1 and 14.2 of the Disclosure Document concurrently operate to effectively require a Franchisor to disclose whether a prospective franchisee is required to make any non-refundable payment.

This means a Franchisor is required to set out under what circumstances a non-refundable payment will be made by a prospective franchisee and how much the non-refundable payment will be for.

In the Form to be Executed

One of the conditions for a Franchisor to take a non-refundable payment is the obligation for the Franchisor to provide a prospective franchisee with a franchise agreement “ïn the form it is to be executed”. This means the franchise agreement provided to the prospective franchisee must be complete, contain all of the terms and conditions which will apply to the prospective franchisee and also include all additional documents that a prospective franchisee would be required to enter into.

However, this does not require a Franchisor to provide a prospective franchisee with a Franchise Agreement that is in “final.” The Franchisor can provide the prospective franchisee with Franchise Agreement in the form a pro forma, template or master agreement. This is because clause 10(3) of the Code states the Franchise Agreement can be amended to (in summary):

1. give effect to the prospective franchisee’s request;
2. fill in particulars (e.g. name and address);
3. provide minor clarification; or
4. correct errors or references.

Conclusion

Before taking a non-refundable payment, a Franchisor should be careful to ensure all of the preconditions to taking such an amount has been satisfied. We can help you to review your process for issuing grants and your franchise documents to ensure you are compliant with these requirements – call our franchising lawyers on 1300 544 755.