Changes to the Franchising Code for new vehicle dealership franchises in Australia

By Lynne Lewis, Megan Edwards

07-2020

Further to our earlier article here on the draft proposed regulations, on 1 June 2020, amendments to the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Franchising Code) came into effect.

Transition provisions are in place which set out when each amending provision applies to existing agreements (for example, depending on when the franchise agreement was entered into and/or when the agreement was renewed or extended).

Parties to motor vehicle dealership agreements should take particular care to ensure compliance with the new provisions.

What are the changes?

The changes to the Franchising Code only apply to new vehicle dealership franchises, being those dealerships that deal in new passenger vehicles and/or new light goods vehicles.

The changes include:

(a) Notification obligations

There are additional notification obligations for franchisors and franchisees in new vehicle dealership agreements and penalties for franchisors who do not comply

Notification obligations Penalty
 

Written notice must be given by the franchisor and the franchisee as to whether either intends to extend the agreement or enter into a new agreement, or neither renew or extend the agreement. 

The time periods for notice are as follows:

  • If the franchise agreement is longer than 12 months in duration, notice must be given at least 12 months before the end of the term of the agreement (or later if agreed)

  • If the franchise agreement is between 6 and 12 months in duration, notice must be given at least 6 months before the end of the term of the agreement

  • If the franchise agreement is less than 6 months in duration, notice must be given at least one month before the end of the term of the agreement.
Breaches of these notice requirements by a franchisor carry a penalty of 300 penalty units.
If a franchisee or a franchisor elects not to renew the agreement or not enter into a new agreement, they must provide reasons. A penalty of 300 penalty units will apply for a franchisor if it does not provide reasons as required.
If a franchisor elects to enter into a new agreement with the franchisee, the franchisor must notify the franchisee that they can request a disclosure document. This request is subject to the provision of s16(2) of the Franchising Code, which says a request for a disclosure document can only be made once every 12 months. A breach of this notification obligation carries a penalty of 300 penalty units.

(b)  Milestones

If a party gives notice that they intend not to extend the agreement or enter into a new agreement, the parties must agree to a written winding down plan, with milestones, including how vehicles, parts, and service and repair equipment will be managed.  The parties must also co-operate to reduce the franchisee's stock of new vehicles and spare parts for the remainder of the term. 

(c)   Capital Expenditure

The current obligation under section 30 of the Franchising Code regarding significant capital expenditure will not apply for new vehicle dealership agreements. Instead, a franchisor will be prohibited from requiring a franchisee to undertake significant capital expenditure during the term of a franchise agreement, except if the following exclusions apply:

  • The expenditure is disclosed to the franchisee in the disclosure document that is given to the franchisee before they enter into or renew an agreement, or when the term or scope of a franchise agreement is extended. The franchisor will be required to include in the disclosure document "as much information as practicable about the expenditure", including the rationale, amount, timing and nature of the expenditure, the anticipated outcomes and benefits, and the expected risks of the expenditure.The Franchising Code includes examples of the type of information that 'could' fit within the scope of this disclosure, including upgrades to facilities or premises, any planned changes to the corporate identity of the franchisor's brand, and indicative costs of building materials;

  • If expenditure is to be incurred by all or a majority of franchisees and a majority of those franchisees approve the expenditure;

  • The expenditure is required to comply with legislative obligations; or

  • The expenditure is agreed by the franchisee.

Further, before entering into, renewing or extending the term or scope of the agreement, the franchisor and the existing/prospective franchisee must discuss the expenditure. Specifically, the parties must discuss the circumstances under which the existing/prospective franchisee considers that they are likely to recoup their expenditure, having regard to their area of operation.  This new obligation forces the franchisee to turn their mind to the ability to recoup any capital expenditure. 

(d)   Dispute Resolution

With regard to disputes, franchisees can request multi franchisee dispute resolution if two or more franchisee have a dispute of the same nature with the franchisor.