Friday, 30 December 2016

Franchising and Premises Leasing



Franchisor as Tenant

Where a franchise system involves use of fixed premises, Franchisors will usually enter into a head lease with the Landlord subject to conditions allowing the Franchisor to offer a sub-lease or licence to occupy to their Franchisees.

This method:
  • allows the Franchisor to retain control of the site in the event of default by the Franchisee;
  • does expose the Franchisor to liability if the Franchisee defaults – the Franchisor would then remain liable to the Landlord for the rent and other obligations;
  • would normally involve an arrangement between the Franchisor and Franchisee (as per the Franchise Agreement and other ancillary documents) whereby the Franchisee provides the bank guarantee/security deposit, takes out relevant insurances, is required to meet rent, outgoings and other obligations under the Lease.
Where the fixed premises are retail in nature, the disclosure regime under the Retail Shop Leases Act 1994 (Qld) must also be complied with (in respect of premises in Queensland).

Franchisee as Tenant

In this case:
  • if the Franchisee were to default under the Lease, the Franchisee would be directly liable to the Landlord for rent and the other obligations under the Lease;
  • the Franchisee would directly provide the security bond/bank guarantee to the Landlord and take out relevant insurances;
  • the rent, outgoings and other obligations under the Lease are the sole responsibility of the Franchisee;
  • make good obligations would also fall solely to the Franchisee.
The trade off for enabling the Franchisee to directly enter into the Lease with the Landlord is the Franchisor loses control of the site.

A way to get around this is for Franchisor to negotiate “step in” clauses with the Landlord.

In the event the Franchisee's lease is terminated, the Franchisor has the option to “step in” to the premises and either continue the franchised business or grant a licence to use the premises to another Franchisee.

Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2016, All rights reserved.

Franchising and Standard Form Contracts



General Background

The Australian Consumer Law (ACL) is a national, state and territory law which commenced on 1 January 2011. The ACL is contained in Schedule 2 to the Competition and Consumer Act 2010 (CCA).

Part 2-3 of the ACL deals with “Unfair Contract Terms”. In short, this part is designed to provide statutory protections for consumers where those consumers are required to enter into a contract with another party and the consumer has little or no opportunity to negotiate the terms of the contract with the other party. Which could be called a "take it or leave it" contract.

These types of contacts can be caught by the “Standard Form Contracts” provisions under Part 2-3 of the ACL.

Under the ACL (apart from certain exceptions), a contract may be deemed a Standard Form Contract if it exhibits one or more of the following characteristics:
  • one of the parties has all or most of the bargaining power relating to the transaction;
  • the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • a party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
  • a party was not given an effective opportunity to negotiate the terms of the contract; 
  • the terms of the contract did not take into account the specific characteristics of other party or the particular transaction;
  • the regulations say it is a Standard Form Contract.
Examples of Standard Form Contracts might include:
  • employment contracts;
  • hire/lease agreements; and
  • financial agreements.
These types of contracts will typically have a standard body of terms and conditions, with perhaps only a few blank spaces for adding names, addresses, signatures, dates and other relevant variable data.

A particular business may use Standard Form Contracts because that business replicates the contract numerous times to end consumers. Using a standard form maybe more efficient as it minimises the time and cost of producing multiple contracts which are essentially the same.

For businesses who do use Standard Form Contracts, the ACL provides certain consumer protections against terms in those contracts which may be deemed “unfair”.

A term of a contract is likely to be unfair if it:
  • causes a significant imbalance in the parties' rights and obligations arising under the contract; 
  • is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and 
  • would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on. 
Examples of terms in a Standard Form Contract which may be deemed unfair are those that:
  • allow one party (but not another) to avoid of limit their obligations; 
  • allow one party (but not the other) to terminate the contract; 
  • penalise one party (but not another) for breaching or terminating the contract; 
  • allow one party (but not another) to vary the terms of the contract.
Where the contract is a Standard Form Contract and a particular term is deemed to be unfair by a Court, the offending term will be “void”, although the contract can continue to bind the parties if it is capable of operating without the unfair term.

A Court may also make an order for compensation where a consumer has suffered loss as a result of an unfair term.

Depending on the nature of the contract, the ACCC or ASIC may be able to provide information and guidance for consumers affected by unfair contract terms.

Franchising

On and from 12 November 2016, the existing unfair contracts provisions for consumers under the ACL will be extended to Standard Form Contracts where:
  • at least one of the parties is a small business (employs less than 20 staff); and
  • the “upfront price payable” under the contract is:
    • no more than $300, 000 in a single year; or
    • $1 million if the contract is for more than 1 year.
An upfront price payable includes any payments to be provided for the supply, sale or grant under the contract that are disclosed at or before the time the contract is entered into.

The new law has been introduced to protect small businesses from unfair terms in business-to-business Standard Form Contracts.

If a small business enters into, varies or renews a Standard Form Contract on or after 12 November 2016, and a term in that Standard Form Contract is deemed to be unfair, that term can be struck out as void.

The franchising industry will likely be one of the industries the subject of the ACCC’s initial compliance activities once the new law commences on 12 November 2016.

From a franchisor’s perspective, given many franchisors will use contracts (eg. Franchise Agreements) that could well fall into the Standard Form Contract definition under the legislation, those franchisors should consider a review of their Franchise Agreements to identify potential unfair terms and make any necessary amendments to those documents.

There is some argument that if a franchisee asks for changes to a Franchise Agreement and the franchisor does enter into legitimate negotiations with the franchisee about such changes, that the Franchise Agreement would not then be classed as a Standard Form Contract (as the parties would have had the opportunity to negotiate the terms). It would then follow that the provisions about Standard Form Contracts under the ACL would not apply.

However, as with any legislative changes, until they are actually tested in the Courts it can be difficult to specifically identify whether a particular contract is a Standard Form Contract or whether a particular clause in a Franchise Agreement might be deemed unfair.

In terms of the "unfairness" issue, as a general assumption the types of clauses which might be caught as "unfair" are clauses which:
  • allow franchisors to terminate the Franchise Agreement without cause;
  • allow franchisors to vary the Franchise Agreement unilaterally;
  • penalise franchisees;
  • require franchisees to provide broad indemnities for franchisors; and
  • restrict the ability of franchisees to take action against the franchisor.
We envisage that key aspects in determining whether a particular clause is unfair will include:
  • the extent to which a franchisee was given an opportunity to negotiate the terms and conditions in the Franchise Agreement before it entered into the agreement; and
  • whether the franchisee obtained independent legal advice before it entered into the agreement.
Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2016, All rights reserved.

Franchising and Good Faith



The Franchising Code of Conduct pursuant to the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 regulates the conduct of franchisors and franchisees within the franchising industry in Australia.

One of the ways in which the Code regulates this conduct is through the notion of “good faith”. That is, each party to a franchise agreement must act towards another party with good faith, within the meaning of the unwritten law [as historically determined by the courts under common law].

Under the Code, this good faith obligation extends to:
  • any dealing or dispute relating to the proposed agreement; and
  • the negotiation of the proposed agreement; and
  • the Code.

In determining whether a particular party has acted in good faith, the Codes states that the Court might consider:
  • whether a party acted honestly and not arbitrarily; and
  • whether a party cooperated to achieve the purposes of the agreement. 

Some examples of conduct which might may not be in good faith:
  • one party acting for some ulterior motive;
  • a party fails to have regard to the legitimate interests of the other party;
  • conduct which is not in pursuit of legitimate commercial / business interests, such as conduct which is strategically motivated to put a franchisee out of business;
  • an arbitrary / unreasonable exercise of contractual discretion;
  • conduct which effectively renders the franchisee's interest under the franchise agreement worthless;
  • failure to give serious and genuine consideration to the other party's position in a negotiation;
  • deliberate failure to disclosure relevant information;
  • the purported termination of a franchise agreement by relying on technical or minor breaches in circumstances where the breaches are not the real motive for the termination. 
A Court can also take into account other matters it considers relevant.

However, the obligation to act in good faith does not prevent a party from acting in their legitimate commercial interests. For example, although a franchisor is required to act honestly and cooperatively during the negotiation of a franchise agreement, there is doubt whether a franchisor is obligated to make additions or changes to an agreement which might be requested by a franchisee.

A failure to act in good faith could result in significant penalties under the Code and/or the issue of infringement notices and fines by the ACCC.

Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2016, All rights reserved.

Friday, 23 December 2016

Franchise Territories

Stone Wall | Boundary | Wall | Territory

Territory selection has a direct impact on the viability of a franchised business and the Franchise System.

Identifying the Territory

Use of a geographic plan which shows territory area or use of postcodes are common ways to identify a territory. Although this may not necessarily be the best approach.

Too large a territory may result in the territory being under-serviced.

Too small a territory may cause the franchised business to become unviable.

Statistical data including demographics; market surveys; and consultants experienced in this field should be utilised to assist with territory selection (as opposed to just selecting an area on say postcodes alone).

Exclusive or non-exclusive territories

A.    Exclusive

Exclusivity implies the Franchisee being given total control of the territory to the exclusion of other franchisees and the Franchisor.

It can happen with newer franchise systems, however, that the first batch of franchisees are given territories that are just too large for them. This potentially causes issues because the Franchisee is either unwilling or unable to develop the customer base within that territory, perhaps because the Franchisee is satisfied with the customer base it has already achieved.

This can then impact on market penetration of the Franchisor’s brand, product or service. 

Franchisor’s maybe able to counter this by setting minimum performance criteria (eg. minimum sales quotes) or set minimum royalty amounts.

B.    Non-Exclusive

As a general rule, the Franchisor has no restriction on granting other franchisees or itself an opportunity to operate a franchised business within a non-exclusive territory.

The difficulty with a non-exclusive territory is how to manage encroachment and cannibalisation within that particular territory.

Exclusivity may not in all circumstances eliminate encroachment either, especially if some franchisees within a system flout the provisions of their Franchise Agreements by seeking customers from within another franchisee’s territory. They may get away with this for a time until the Franchisor or affected Franchisee become aware of the encroachment.

Franchise Agreements do sometimes include provisions allowing the Franchisor to alter the territory, eg. to allow for population growth within the territory.

Generally there will be no restriction on other franchisees or the Franchisor operating within a non-exclusive territory.

Even where the territory is exclusive, there may still be provisions in the Franchise Agreement allowing other franchisees or the Franchisor to operate within the territory. Eg:


  • Where the Franchisee has breached the Franchise Agreement;
  • The Nominated Representative or Franchisee has become sick and unable to carry out its obligations;
  • The Franchisor is permitted to sell its products/services on line;
  • The Franchisee is not meeting certain performance criteria.


Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.


Copyright © Greyson Legal 2016, All rights reserved.

Franchise Advisory Councils


Meeting | Board | Discussion

Franchise Advisory Councils (FAC's) are a representative committee elected to act on behalf of all franchisees within a system, much like a union.

The FAC in effect acts as a central mouthpiece for franchisees designed to provide feedback to the franchisor, to contribute ideas, and provide information to the franchisor with a view to improving the franchise system and brand as a whole.

FAC’s can have varying levels of formality or informality.

The FAC typically would meet with the franchisor quarterly or bi-annually.

The committee members in effect act in an advisory or consultative manner with the franchisor.

FAC is based on the understanding that the franchisor would take on board the information or recommendations made by the FAC when the franchisor is determining its strategies for the franchise system.

Topics that may be covered in the FAC meetings could be quite varied and might include, for example:
  • Supply of goods and services;
  • Pricing of goods and services;
  • Plant & equipment needed for the franchised businesses;
  • Marketing, promotion and advertising;
  • Franchisee support;
  • Operational matters.
A well conducted FAC will incorporate a written charter (or By-Laws) by which the FAC operates.

Ultimately, operating a successful FAC that adds value to the system and its stakeholders will depend on sound communications, commitment of the franchisor and the franchisees, the capabilities of the individual FAC members and how well the FAC is structured.

Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2016, All rights reserved.

End of Term Arrangements


Time limit | End | Termination | Stop watch | Countdown

Under the Code, the Franchisor is required, at least 6 months before the end of the term of the Franchise Agreement, to provide written notice to the existing Franchisee as to whether the Franchisor will renew (or not renew) the Franchise Agreement or enter into a new Franchise Agreement.

If the term is less than 6 months, then the notice period is shortened to only 1 month. The Franchisee also still needs to satisfy any pre-conditions to renewal as set out in the Franchise Agreement.

In addition, the Code prescribes that Franchisors must set out in the Disclosure Document the process to apply at the end of the Franchise Agreement, including:

  • whether the Franchisor will require the Franchisee to enter into a new Franchise Agreement;
  • whether the Franchisee will have any options to renew the Franchise Agreement;
  • if any exit payment is payable to the Franchisee;
  • what is to happen to unsold stock;
  • how marketing material is to be dealt with;
  • what happens to the plant & equipment and any premises fitout at the end of the term;
  • will the Franchisee be entitled to sell the franchised business at the end of the term;
  • whether the Franchisor is granted any right of first refusal to acquire the franchised business, and if so, what is the mechanism to determine the market value ?;
  • what happens to any significant capital expenditure by the Franchisee associated with the franchised business – how will this affect the arrangements to apply at the end of the Franchise Agreement?
It is important to ensure that the Disclosure Document and Franchise Agreement appropriately deal with these issues.

Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2016, All rights reserved.

Disclosure Documents



Disclosure Document | Franchising | Code compliance

The purpose of disclosure is to give to a prospective Franchisee entering into a Franchise Agreement (or an existing Franchisee proposing to renew or extend their Franchise Agreement), information to assist the Franchisee to make a reasonably informed decision about the franchise system and the franchised business.

The Code prescribes that a Franchisor must give a current Disclosure Document to:
  • a prospective Franchisee at least 14 days before the prospective franchisee enters into the Franchise Agreement or pays a non-refundable payment;
  • a Franchisee renewing or extending their franchise, at least 14 days before the renewal or extension is effective.
The Disclosure Document must be prepared and contain the information prescribed by the Code.

The Franchisor must also update its Disclosure Document on an annual basis and provide this to the Franchisee within 4 months after the end of each financial year.

A Franchisee can request a copy of the current Disclosure Document, although only one request is permitted in any 12 month period.

The Code provides that where there are “materially relevant facts” which come into existence after a previous disclosure period, then the Franchisor must inform the Franchisee in writing, within a reasonable time not exceeding 14 days after the Franchisor becomes aware of the fact or matter. Eg. a change in the majority ownership or control of the Franchisor.

Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2016, All rights reserved.