Franchising Code of Conduct – exposure draft

Craveable Brands Position on Exposure Draft

Background
Craveable Brands (Craveable) operates four iconic Australian franchise brands, Red Rooster,
Oporto, Chicken Treat and Chargrill Charlie’s.
The franchise network has around 600 plus stores and collectively employs over 13,000 employees.
Craveable Brands considers that the Franchising Code is largely fit for purpose and is broadly supportive of the recommendations put forward by Dr Michael Schaper in his review.
Craveable has reviewed the Exposure Draft of the new Code and has a number of practical concerns. We set out our commentary below which includes practical examples and recommendations to assist.

Insufficient Time to Implement
The new code is intended to take effect from 1 April 2025. Noting that franchisors will be required to substantially amend their franchise agreements and revise Disclosure Statements, this does not give Franchisors sufficient opportunity to make the changes.

Practical Example #1
Each year in July, Craveable begins updating its Disclosure Statements which are required to be finalised by 31 October (i.e. it takes around 4 months to properly finalise, and the disclosure is around 300+ pages). The Exposure Draft will require Craveable to amend its disclosure by 31
October 2024, 1 March 2025 and 31 October 2025.

Further, the Exposure Draft will require Franchisors to substantially amend their franchise agreements, and there is an added requirement to update the referencing to sections of the Code
(since all sections are re-numbered) and include an index (to a 300+ page document).

Also, pursuant to section 20 (2), the Disclosure Statement must now reflect the position as at the date of the update. This is a significant administrative burden on the Franchisor.

Recommendation #1

Noting that Franchisors will be required to update their Disclosure Statements 3 times in 12 months, we strongly recommend that the requirement to update the Franchise Agreement and
Disclosure Statement take place within 4 months after the date of expiry of the current financial year (i.e. in Craveable’s case by 31 October 2025).

The Disclosure Statement Must Reflect the Franchisor’s Position
New section 20 (2) states that the Disclosure Statement must reflect the position of the
Franchisor AS AT THE DATE OF THE UPDATE.

Practical Example #2
In Practical Example #1 we noted that it takes around 4 months for Craveable to update its
Disclosure Statement.
Craveable starts this process in July at the conclusion of each financial year.
If the Disclosure Statement must reflect the position as at the date of the update (which is presumably the date it is signed) and not the last day of the previous financial year, this means that Franchisors like Craveable that operate a large franchise network must continually update the Disclosure Statement in this period of revision (in Craveable’s case between July and October). Some of these changes like the number of stores in the network and details of franchisees change daily.
Effectively, if there are changes to the Disclosure Statement, even a week before signing or even a day before signing, then the Disclosure Statement requires updating to reflect that change.

Practical Example #3
The requirement for a Disclosure Statement to reflect the Franchisor’s position AS AT THE
DATE OF THE UPDATE is inconsistent with:
- Section 32, which requires the Franchisor to provide the Franchisee, on request,
with a Disclosure Statement AS AT THE END OF THE FINANCIAL YEAR (instead of as
at the date of the update).
- Section 10(1)(k)(ii) of the Disclosure Statement which references information in the
previous financial year.
- Section 6.4 of the Disclosure Statement which references, transfers, terminations,
buy backs etc. in the last 3 financial years.
Additionally, Section 20(2) and 32 conflict. This means that if a franchisee makes a request under section 32, the Franchisor must prepare a different Disclosure Statement to the one currently in use. This is unworkable.

Recommendation #2
Section 20(2) must be modified so that the Disclosure Statement must reflect the position of the Franchisor AS AT THE END OF THE LAST FINANCIAL YEAR.

The Inherent Issues with Section 42
Section 42(2) (a) requires a Franchisor to compensate the Franchisee if a franchise agreement is not renewed or the Franchisor does not enter into a franchise agreement.

Practical Example #4
Practically how does section 42(2)(a) operate if the Franchisee is holding over under its
existing franchise agreement and the Franchisee elects not to extend/renew the franchise
agreement?

Practical Example #5
Practically how does section 42(2)(a) operate if the Franchisee elects not to renew its
franchise agreement?

Practical Example #6
Practically, how does section 42(2)(a) operate if the Franchisee holds the head lease and
elects not to renew the franchise agreement, or the landlord does not renew the head lease?
In those cases, the Franchisor has no lease tenure (and the site is lost) yet the Franchisor is
expected to compensate the Franchisee. Further, if the Franchisee holds the head lease and
the Franchisor is required to buy the Plant and Equipment, what happens if the Franchisor is
refused entry to remove it (given the Franchisor has no occupation rights)?

Practical Example #7
The Franchisee is in significant arrears and owes the Franchisor considerable monies. For
this reason, the Franchisor chooses not to renew or extend the franchise agreement. Should
the Franchisor, in those circumstances, be required to compensate the franchisee when it
was the actions of the Franchisee that lead to the non-renewal?

Practical Example #8
Same as above except the Franchisee has committed multiple breaches during the initial
term of the Franchise Agreement.

Recommendation #3
There are a number of scenarios where it is unreasonable to expect the Franchisor to
compensate the Franchisee where the franchise agreement is not renewed or extended.
Accordingly, section 42(2)(a) needs considerable amendment to take these factors into
account or is deleted in its entirety.

Issues with Section 43
Section 43 provides that a Franchisor must not enter into a franchise agreement unless the agreement provides the Franchisee with a reasonable opportunity to make a return during the term of the franchise agreement on any investment required by the Franchisor.

This amendment was presumably brought in to mirror the automotive industry provisions under the Franchising Code across the entire franchising sector. However, the automotive industry circumstances were considerably different. This industry required significant upfront investment and often short periods of time to recoup investments. By contrast, while the franchising sector is wide and diverse, a large number of franchising systems require considerably less investment and offer tenure of up to 10 years.
Of note, how do you measure what is “reasonable” and what forms part of a “return” over such a diverse industry as franchising?
This is incredibly subjective. What one person considers is a reasonable opportunity to make a return on investment will differ from another.
This section lacks certainty and it is left to case law to dictate the parameters.
Without certainty, this provides instability in the Franchising Industry.

Practical Example #9
A Franchisee (X) s granted a franchise agreement for a term of 10 years. 7 years have
elapsed leaving 3 years remaining. The Franchisee X chooses to sell his business to a
prospective Franchisee (Y). The Franchisor consents to the transfer and terminates the
existing franchise agreement with Franchisee X and grants a new franchise agreement to
Franchisee Y for the balance of the original term (3 years). There is new technology that
would be advantageous to the business. The Franchisor is keen to roll out this new
technology into franchise stores. The Franchisor requires Y to invest in the new technology.
This scenario would, at face value, potentially be contrary to section 43.

Practical Example #10
A Franchisee (X) is granted a franchise agreement for a term of 10 years. 7 years have
elapsed, leaving 3 years remaining. The Franchisor holds the lease of the premises that the
business operates from. The lease contains a requirement to refurbish the premises.
Franchisee X sells its business to Y. Y enters into a new franchise agreement with the
Franchisor for the balance of the original agreement (3 years). The sale price (i.e. the amount
paid by Y to X) reflects the fact that Y will need to refurbish the premises to satisfy the
requirement in the lease.
The Franchisor has granted Franchisee Y a franchise for a term of 3 years. Notwithstanding
that the sale and payment of the purchase price was between X and Y, has the Franchisor
discharged its obligations, under S43 if it requires Franchisee Y to refurb the store to meet
the requirements in the Lease?
Practical Example #11
The Franchisee’s return on investment is poor because the Franchisee is an extremely poor
operator. It is recognised that the franchise would be considerably more profitable if the
franchisee were a better operator.
Does this get factored in when considering whether the Franchisee has had a reasonable
opportunity to make a return to the Franchisee?

The above are some clear examples where section 43 is not practical and is inherently onerous on the Franchisor.

Recommendation #4

Section 43 needs to be deleted – the vast majority of the Franchising sector does not mirror the
circumstances of the automotive industry. Further, Franchisees are able to make their own
independent assessment as to whether they can make a return on investment and are
encouraged to obtain independent financial and legal advice prior to entering into any franchise
agreement. If there is a concern in this area, perhaps it should be made mandatory for an
incoming Franchisee to obtain independent financial advice.

Immediate Termination
Franchisors have expressed considerable concern with the existing provisions dealing with immediate termination (section 29). This was noted in Dr Michael Schaper’s review.
In particular, there is concern that Franchisors can’t immediately terminate for:

• Fraud
• Abandonment
• Operating the business in a way that endangers public health or safety

They must give 7 days prior notice and termination is further delayed if the Franchisee gives the
Franchisor a dispute notice.
Despite Dr Schaper’s acknowledgment that these provisions require change to enable the
Franchisor to terminate quickly, the new Code fails to make any changes (see section 55).
We note that contrary to section 55, where the Franchisee no longer holds, an appropriate license, becomes insolvent or bankrupt, becomes deregistered with ASIC (if a company) or is convicted of certain offences against the Migration or Fair Work Act then the only restriction imposed upon terminating immediately is giving 7 days’ prior notice (see s54).
We are unsure why the provisions contained in section 54 were considered differently to those contained in section 55?
The right to terminate immediately set out in section 55 should be simplified.
We also consider that the changes in section 54 (that permit a Franchisor to immediately terminate if the Franchisee is convicted of an offence against certain provisions of the Fair Work
Act or the Migration Act) are not practical and will be ineffective and rarely utilised (if at all).

Practical Example #12
The Franchisor undertakes an audit which discloses that the Franchisee is significantly underpaying its employees and has committed offences against those provisions of the Fair
Work Act and Migration Act in section 54.
The Franchisee is prosecuted, but it takes 1 year for the Franchisee to be convicted. Should the
Franchisor have to wait that long to immediately terminate? Is this in the public’s interest if the
Franchisee continues to employ employees in the franchised business and might continue to underpay them up until the date of conviction?

Practical Example #13

What if in the above circumstances, the Fair Work Ombudsman chooses not to prosecute?
In 2019, following an audit undertaken by Craveable, Craveable discovered that a Franchisee of seven stores in Queensland was significantly underpaying its employees. The matter was referred to the Fair Work Ombudsman who chose not to prosecute the Franchisee.

Recommendation #5
Section 53 and 54 of the Code need to be rewritten to allow immediate termination to be manageable for Franchisors especially where the conduct of the Franchisee is likely to be extremely damaging to the Franchisor’s brand, or detrimental to customers or employees and other Franchisee’s businesses.

Removing the Right to Terminate
Section 52(1)(b) takes away the right of the Franchisor to terminate for breach of a franchise agreement where the grounds fall within section 54 or section 55. Franchisors should have the right to elect how they terminate a franchise agreement (whether immediately or by giving notice)

Issues will arise where a Franchisee breaches provisions as to whether they endangered public health and safety.

Often in those instances, Franchisors will, as a precaution, choose to issue a breach under
Section 27 (not section 52) instead of immediately terminating as they are unsure if the event is sufficiently serious to categorise it as endangering public health and safety.

Recommendation #6
Section 52(1)(b) should be removed.
Public Refusal to got to ADR
Section 75 allows the ASBFEO Ombudsman to publicise the fact that a Franchisor refuses to engage in ADR or withdraw from it.

Recommendation #7

Section 75 should be reciprocal. It should apply to both Franchisors and Franchisees.

Summary

We consider that the Exposure Draft provides clarity in many cases, and we are supportive of the Code and consider it fit for purpose. Our main concerns however are:

• It fails to simplify disclosure.
• It places an unreasonable administrative burden on Franchisors and does not permit
Franchisors sufficient time to implement necessary changes.
• It fails to redress Franchisor concerns around immediate termination.
• It implements concepts of compensation that are appropriate to the automotive
industry, but not franchising in general.
• The notion of a reasonable return on investment is vague, subjective and fails to factor in
multiple scenarios that are relevant.

We trust that the above is of assistance.

DATED: 29 October 2024

KAREN BOZIC
Group Chief Executive Officer – Craveable Brands
Level 12, 12 Help Street
CHATSWOOD NSW 2067