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Franchising can benefit both the franchisor and the franchisee. For the franchisor, franchising means fast business growth, higher visibility, and more profit. For the franchisee, they can step into an already established brand, having a clear plan on how to run the business.
It’s common for franchises to perform well, making it an appealing option to either extend o renew their franchise term. Franchise renewal or extension isn’t always a simple process, though, as there are certain requirements set out by Australian laws.
In this article, we’ll run through the franchisor’s obligations to extend or renew their franchise term.
What Is A Franchise Term? Why Would It Be Extended?
A Franchise Term sets out how long the Franchise Agreement will operate for, as they normally run for a set amount of time. Both franchisors and franchisees will understandably want to extend the franchise term if business is going well.
A franchise extension means you will need to consult a lawyer so that the details of the extension are detailed in writing.
If for any particular reason either party wants to end the Franchise Agreement, they can choose not to renew the franchise term, or to terminate the franchise agreement.
What Do You Need To Do To Extend A Franchise Term?
Before a franchise term ends, a franchisor must do the following:
- Let franchisees know whether they will extend the franchise or begin a new franchise agreement. This is called an ‘end of term notice’.
- At least 6 months notice must be given, or if an agreement has only been in place for 6 months, at least 1 months notice must be given.
- When extending the franchise, an end of term notice must also disclose that the franchisee can have a copy of the disclosure document.
You can read more in general about what documents franchisors need from the beginning here.
What Are Disclosure Obligations?
You would have given a disclosure document to the franchisee at the beginning of your relationship. But what you may not know is, as a franchisor, you must also renew and maintain this disclosure document.
Franchise renewal can be a bit confusing since there are so many regulations around it in Australia. Our lawyers are happy to chat you through your options if you find yourself in this position.
Franchisees have a right to access a current disclosure document before renewing or extending their franchise agreement with you. Franchisees can ask for a disclosure document every year.
A disclosure document should include;
- Information on legal proceedings against the franchisor
- Whether the franchisee is able to extend, renew or enter into a new agreement when the franchise agreement reaches its term
- Fees the franchisee may have to pay
- Financial details
- Contact details of franchisees, past and present
Other Disclosure Obligations Franchisors Need To Comply With
According to the Franchising Code, there are additional mandatory disclosure requirements.
As well as providing the disclosure document:
Franchisors should get written confirmation from franchisees confirming they comprehend the disclosure document.
- Franchisors should give the franchisee a new copy of the franchise agreement, and
- Franchisors should give franchisees a copy of the Franchise Code.
What Happens If Franchisors Don’t Comply With The Code?
If franchisors don’t do the above, the ACCC can take enforcement action. A recent example of this involves popular franchisor Bob Jane. Bob Jane did not give written notice to franchisees whether they meant to extend the franchise agreement or begin new franchise agreements within the cut off time.
Bob Jane also did not provide the necessary documentation under the code before extending agreements, and did not get written statements from franchisees. In this case, Bob Jane must now run a compliance program and is under a court-enforceable undertaking to observe the Franchise Code.
The Code also sets out other important obligations, such as paying the relevant franchise fees. It’s always worth consulting a legal professional so that you can be confident in your decisions for your franchise.
What Next?
If you are a franchisor, make sure you comply with the Franchise Code and provide the disclosure documents and get written confirmation from your franchisees that they understand your disclosure documents. It’s imperative you stay organised and submit and obtain paperwork by the deadlines according to the Franchise Code, and remain compliant with your Franchise Agreement as well. .
If you are a franchisee, remember you can request disclosure documents every 12 months and don’t need to wait for the franchisor to take the initiative.
If you are a franchisor or franchisee and need help understanding your obligations around renewing or extending your franchise agreement, don’t hesitate to reach out to us on 1800 730 617 or by email at team@sprintlaw.com.au. We specialise in franchise law and can talk you through your situation.
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