In the previous edition of Talking Franchise and Retail, we highlighted a number of amendments to the Franchising Code of Conduct (the Code). The amendments are a mix of significant changes to the form of the disclosure document, and a number of minor changes which simply reflect accepted practice. The amendments took effect on 1 July 2010 and apply to all franchise agreements entered into on or after that date.

In this edition, we take a look at some of the major disclosure document amendments:

• a) Payments:

A new provision in Section 13 requires franchisors to disclose to franchisees each recurring or isolated payment that is within the franchisor's knowledge or control, or which can be reasonably foreseen by the franchisor, that the franchisee must pay to third parties.

This requirement is in addition to the existing requirement that franchisors disclose payments that franchisees will be expected to make over the course of the franchise. Whilst many of these payments are commonly disclosed by franchisors when setting budgets, franchisors now need to show reasonable evidence for the payment estimates in the disclosure document for the term of the franchise.

• b) Unforeseen significant capital expenditure:

A new Section 13A requires franchisors to disclose whether they will require their franchisees to undertake unforeseen significant capital expenditure, such as equipment updates and store fit-outs, not disclosed before the franchisee entered into the franchise agreement.

This section aims to draw franchisees' attention to the possibility of such capital expenditure before they enter into a franchise agreement. Franchisors do not need to specify any details regarding amount or timing.

• c) Unilateral variation of a franchise agreement:

A new Section 17A, effective from 1 July 2011, requires franchisors to disclose each instance since 1 July 2010 where they have unilaterally varied a franchise agreement. Importantly, where the franchise agreement expressly incorporates the obligations detailed in the operations manual, any changes made to the operations manual will need to be disclosed.

d)    Arrangements to apply at end of a franchise agreement:

A new Section 17C requires the end of term arrangements to be set out. These include details of options to renew, exit payments to franchisees, unsold stock and other assets, rights to sell the business, and whether the franchisor will consider significant capital expenditure incurred by the franchisee.

Franchisors need to ensure they comply with these new disclosure requirements. We recommend you seek advice from legal advisors regarding the new requirements and the form of the new disclosure document. The WHK Group can help you to verify the cost of estimates included in the disclosure document.

Ray Walker

Principal, Business Services

P. 03 9258 6707

E. ray.walker@whk.com.au