The ultimate franchisee legal rights guide: your 13 legal rights that you need to know right now
Updated: 8 December 2019
If you own a franchise, read on to find out your 13 legal rights that have and need to know right now.
And you are just thinking about purchasing a franchise but have not yet purchased, you may wish to read our 6 best in-depth legal tips to help prepare you for owning your first franchise.
In a hurry? Jump ahead.
It is a good idea to read the franchising code if you need more detail.
Also, while we focus on franchising code rights for franchisees in this article, you also have responsibilities under the same code.
So what exactly is the franchising code?
The franchising code applies to all the parties to a franchise agreement and it's legally binding.
Now, your rights under the code are in addition to your rights under Australian consumer and competition laws.
Also, the code is mandatory and breaches attract civil penalties.
And no, the franchisor cannot opt out of the code.
First, you will get an information statement from the franchisor when you enter into an agreement for the first time. Here's what it looks like.
And, the risks and rewards of franchising are also included in the information statement.
The franchisor must also give you a disclosure document as a prospective franchisee.
Your disclosure document needs to be in a certain format.
So here is what the disclosure should look like - Australian Consumer and competition disclosure document template.
And a director, officer or agent of the franchisor must sign it.
Also, the franchisor must update the disclosure document within 4 months after the end of each financial year.
However, the franchisor does not have to give you a disclosure document in these instances:
- if they only take on 1 or no new franchisee's in the past year; and
- don't intend on taking on any more in the following year.
Documents the franchisor needs to give you
The franchisor must give you these documents:
- the franchise code; and
- information statement; and
- disclosure document; and
- franchise agreement, at least 14 days before you:
- enter into the agreement; or
- make a non-refundable a payment to the franchisor.
And, importantly, the franchisor cannot enter, renew or extend a franchise agreement with you if you have not given them a written statement that you have received and understand the disclosure document and franchising code.
2. Copy of agreements
In addition to the agreements above, if you are also leasing from the franchisor, they must give you a copy of the signed lease within a month.
Also, here are other agreements you can get copies of:
- intellectual property agreements; and
- security agreements including a guarantee, mortgage or loan agreement; and
- confidentiality agreement; and
- restraint agreement - so you do not to carry on business within a certain area after your agreement ends.
Copy of financial statements
In addition to the agreements above, if your franchise agreement states that you must pay money to a marketing or another fund, you have the right to receive an annual financial statement.
And that statement should detail the receipts and expenses for the last financial year.
Also, here are some of your other statement rights:
- you must receive the statement within 4 months after the end of the last financial year; and
- there should be sufficient detail of the receipts and expenses; and
- the statement should be audited by a registered company auditor; and
- you should receive the statement within 30 days of it being prepared.
You need to know about material facts
The franchisor must tell you about any material facts that are not in your disclosure document, within 14 days of learning about them.
And if you are wondering what is a material fact, here are some examples:
- ownership - a change in majority ownership or control of the franchisor; and
- legal cases - a criminal or civil judgement; and
- intellectual property - change in ownership or control.
3. Your rights at the end of the agreement
Also, the franchisor must give you written notice if they plan to extend your agreement or enter into a new one with you.
So how much notice should you receive?
- if your agreement is for 6 months or longer - at least 6 months before the end of your term; and
- if your agreement is for less than 6 months - at least 1 month before your agreement ends.
4. No release from liability
- general release - a general release of the franchisor's liability towards you; or
- waiver - a waiver of any verbal or written representation made by the franchisor.
And if you have either of these in your agreement, they will have no effect.
5. Settling disputes & who pays
Any mediation or court action must occur in the state or territory where the franchise is based.
So if there's a clause that says otherwise, it won't have any effect.
Also, your mediation costs are split with the franchisor and if your agreement requires you to pay, that clause will have no effect.
6. Restraint of trade clauses
What's the purpose of a restraint? A restraint protects the interests of the franchisor.
How? By stopping you from running a competing business for a certain time during and after your agreement ends.
However, the good news is you won't be bound by a restraint in your franchise agreement if you have given notice seeking to extend your agreement on similar terms to the current agreement, and these conditions are met:
- you were not in breach of the agreement; and
- there are no breaches of intellectual property or confidentiality agreements during the term; and
- you have not received compensation for goodwill because the agreement has not been extended.
7. Transferring your agreement
The franchisor must respond to you in writing about whether they agree to a franchise transfer.
But, if the franchisor does not consent, they need to give you their reasons.
Now, if the franchisor does consent, they need to tell you whether any conditions need to be met.
Importantly, a franchisor must not unreasonably withhold their consent.
And a franchisor may only be able to reasonably withhold consent in these instances:
- finances - if it is unlikely the buyer will be able to meet their financial obligations under the franchisee agreement; or
- reasonable requirement - if the buyer does not meet a reasonable requirement in the agreement for the transfer; or
- selection criteria - if the buyer fails to meet the selection criteria; or
- no agreement - if the buyer does not agree, in writing, to comply with their franchisee obligations; or
- statement - if the buyer has has not given a written statement that they received, read and had a reasonable chance to understand the disclosure document and the franchising code.
Also, consent can be reasonably withheld if you have not:
- paid or made arrangements to pay an amount owing to the franchisor; or
- fixed a breach of your agreement.
Now, you will have consent if the franchisor does not advise you in writing, that they do not consent to the transfer of the agreement within 42 days of the latter of:
- the date the request was made; and
- if the franchisor seeks further information - the date the last of the information was given to the franchisor.
8. Ending your agreement
Cooling off period
The cooling off period means you may end your franchise agreement within 7 days after the earlier of:
- you entering into the agreement; and
- you making any payment under the agreement.
Now, if you end the agreement during the cooling off period, the franchisor must, within 14 days, give you back all the money you paid the franchisor.
However, the franchisor may however deduct their reasonable expenses set out in the agreement.
Notice of termination
If there is a termination because of your breach and the franchisor wants to end the agreement, they must give you reasonable notice in writing.
And the franchisor needs to tell you about what you need to do to fix the breach and allow you a reasonable time to do this.
Also, you are entitled to reasonable notice if the franchisor wants to terminate and there is no breach.
9. No capital expenditure
A franchisor must not make you spend significant capital expenditure for a franchise business.
Capital nature expenses include ones that:
- are outlined in the disclosure document that is given to you before either entering, renewing or extending the franchise agreement; and
- paid by all or a majority of franchisees; and
- are made to comply with legislative obligations; and
- necessary as a capital investment to improve the business.
10. Correct use of your marketing fees
You are entitled to have funds that you have paid into the marketing fees and advertising front used only to pay for expenses that:
- have been disclosed in the disclosure document; or
- are legitimate advertising expenses; or
- agreed by majority of franchisees; or
- pay the reasonable cost of administering and auditing a marketing fund.
11. Your privacy
When your agreement ends, you can request in writing that your details are not disclosed. In this case, the franchisor must not disclose your details to a prospective franchisee.
In addition to your privacy rights, a franchisor must not prevent your or a prospective franchisee's freedom to form an association, or their ability to associate with other franchisees or prospective franchisees for a lawful purpose.
In addition to your associations rights, you are entitled to dispute management processes per the procedure in the franchising code.
If you wish to raise a dispute, you can send a written notice to the franchisor with the:
- nature of the dispute; and
- outcome you want; and
- action you think will fix the dispute.
And if your dispute is not resolved within 3 weeks, either party may refer it to a mediator.
Further, both parties must share mediation costs, unless they agree otherwise.
Finally, you have rights and if you are unsure about anything, get legal advice quickly. In particular, if you have been issued with a dispute notice to avoid having to pay certain costs or penalties to the franchisor.