Explanation

Section 43(2) is relevant to all franchise agreements that are not new vehicle dealership agreements.

Franchisors are prohibited from entering into a franchise agreement unless the agreement provides for the franchisee to be compensated if the agreement is terminated before it expires because the franchisor:

• withdraws from the Australian market;
• rationalises its networks in Australia; or
• changes its distribution models in Australia

(Early Termination Circumstances).

The agreement must specify how compensation is to be determined, with specific reference to:

• lost profit from direct and indirect revenue;
• unamortised capital expenditure requested by the franchisor;
• loss of opportunity in selling established goodwill; and
• costs of winding up the franchised business

(the Compensation Factors).

Action Item

Franchisors will need to update their franchise agreements to include provisions addressing the requirements of section 43(2) of the New Code.

In doing so, franchisors should:

• consider including a right to terminate the franchise agreement on reasonable notice in the event of an Early Termination Circumstance;
• ensure they set out a process for how a franchisee may claim compensation if an Early Termination Circumstance arises;
• set out a formula or the valuation principles that will be applied to determine the compensation payable to the franchisee, and include specific reference to how the Compensation Factors will be considered; and
• include a cap on the amount of compensation the franchisee can claim. In determining the cap, franchisors need to act in good faith, including by considering the lost benefit the franchisee will suffer as a result of the franchise agreement being terminated before its intended expiry date.

Timing

This section applies to franchise agreements entered into, transferred, renewed or extended on or after 1 November 2025.[1]

Explanation

Sections 43(3) and (4) are relevant to all franchise agreements that are not new vehicle dealership agreements.

Franchisors are prohibited from entering into a franchise agreement unless the agreement requires the franchisors to buy back or compensate the franchisee for certain items, in the event the franchise agreement is terminated before its expiry date because of an Early Termination Circumstance.

The items that the franchisor must buy back or compensate the franchisee for are:

• outstanding stock purchased by the franchisee that was specified by the franchisor and required to operate the franchise; and
• all essential speciality equipment and branded product or merchandise purchased by the franchisee that was specified by the franchisor and required to operate the franchise, and that cannot be repurposed for a similar business.

Action Item

Franchisors will need to update their franchise agreements to include provisions addressing the requirements of sections 43(3) and (4) of the New Code.

Franchisors should consider the following:

• the nature of the items that they will need to buy back or compensate the franchisee for, and specify a process for how it will value these items;
• in determining a valuation method, franchisors need to remember to act in good faith; and
• market value is likely to be a reasonable starting point as a valuation method.

Timing

This section applies to franchise agreements entered into, transferred, renewed or extended on or after 1 November 2025.[2]

Explanation

Section 44 is relevant to all franchise agreements that are not new vehicle dealership agreements.

This section 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 agreement, on any investment required by the franchisor as part of entering into, or under, the agreement.

Action Item

There is no requirement for franchisors to update the drafting of their franchise agreements to address section 44 of the New Code, however, an acknowledgment confirming that the parties have done so may be helpful.

Our recommendation is that a franchisor should have evidence to demonstrate that it has considered section 44 of the New Code, in particular in determining the length of the term of the franchise agreement in the context of the investment made by the franchisee that is required by the franchisor.

Timing

This section applies to franchise agreements entered into, transferred, renewed or extended on or after 1 November 2025.[3]

Explanation

Under section 57 of the New Code, the circumstances under which a franchisor may terminate on 7 days’ notice have been expanded to include three new grounds involving breaches by the franchisee of certain provisions of the Fair Work Act and the Migration Act (refer specifically to sections 57(1)(d), (e) and (g) of the New Code). However, to rely on these grounds, the termination rights must be included in the franchise agreement.

Expedited dispute resolution is no longer available to franchisees if an agreement is terminated by a franchisor on 7 days notice in the circumstances described in section 57 of the New Code.

However, expedited dispute resolution may continue to be accessed by franchisees if a franchise agreement is terminated by a franchisor on 7 days notice in the circumstances described in section 58 of the New Code.

Action Item

Franchisors need to update their franchise agreements to give themselves the right to terminate on 7 days notice in the event of one of the new grounds of termination in section 57 of the New Code.

Franchisors should also generally check that the drafting of their termination provisions is consistent with sections 57 and 58 of the New Code.

Timing

This section applies to franchise agreements entered into, transferred, renewed or extended on or after 1 April 2025.

Explanation

The New Code introduces the concept of a specific purpose fund which is a fund:

• controlled or administered by the franchisor (or its associate);
• to which a franchisee must contribute under the terms of a franchise agreement; and
• that, under the franchise agreement, must be used for a specified common purpose relating to the operation of the franchised business.

Marketing funds and cooperative funds are specific purpose funds, but other funds that fall within the definition will also be captured.

Sections 31 and 61 of the New Code include obligations of the franchisor in relation to specific purpose funds. These are the same as existing obligations that relate to marketing funds. For example, franchisors will need to:

• prepare and distribute an annual financial statement for each specific purpose fund; and
• hold money collected for each specific purpose fund in a separate bank account.

Item 15 of Schedule 1 of the New Code which is relevant to specific purpose funds in a disclosure document has also been updated.

Action Item

In addition to existing marketing and cooperative funds, franchisors need to consider whether they have any other funds that are specific purpose funds for the purposes of the New Code.

If so, franchisors need to take steps to ensure they are ready to comply with sections 31 and 61 of the New Code, and to respond to Item 15 of the disclosure document, in respect of all specific purpose funds, by 1 November 2025.

Timing

Franchisors need to continue operating existing marketing and cooperative funds in compliance with the Old Code until 31 October 2025.[4]

From 1 November 2025, all specific purpose funds (including existing marketing and cooperative funds) will need to operate in compliance with sections 31 and 61 of the New Code. Item 15 of the disclosure document will also need to be updated by this date to reflect disclosures about all specific purpose funds held by the franchisor.[5]

Explanation

Franchisors are now required to include details in their disclosure document of whether the franchisee will be required to undertake significant capital expenditure during the term of the franchise agreement.

This information needs to include details of:

• the rationale for the expenditure;
• the amount, timing and nature of the expenditure;
• the anticipated outcomes and benefits of the expenditure; and
• the expected risks associated with the expenditure.

Franchisors must not sign a franchise agreement unless they have first discussed any significant capital expenditure disclosed with the franchisee, including the circumstances in which the franchisee is likely to recoup the expenditure.

Action Item

Franchisors need to ensure they consider all potential significant capital expenditure requirements that may be relevant during the term of a franchise agreement and make appropriate and meaningful disclosures about these expenditure requirements in their disclosure documents.

Timing

These obligations apply from 1 November 2025.[6]

Franchise Agreement

• Update your franchise agreement to ensure it aligns with the 7 day termination notice provisions in sections 57 and 58 of the New Code.

• If relevant, review any restraint of trade clause(s) that appear in your franchise agreement to make sure it does not offend section 42 of the New Code.

• Ensure any ‘legal cost’ charged to the franchisee under your franchise agreement is permitted under sections 38 and 65 of the New Code and is a ‘reasonable and genuine’ amount.

Disclosure Document

• For strict compliance with the New Code, an interim update of your disclosure document should be conducted.

• Subject to our comments below, you should update your disclosure document items so that they reflect the wording and numbering of Schedule 1 of the New Code (noting that there are minor language and section updates throughout).

• Include new Items 4(1)(b)(ia), 6(5) and 9(2)(f) of Schedule 1 of the New Code in your disclosure document and respond to these items.

• You do not need to include and respond to Items 14(1A), 14(1B) or 15 of Schedule 1 of the New Code in your disclosure documents for the time being. However, nothing stops you from responding to these items now if you are able to do so for efficiency.

• If you do not include new Item 15 in your disclosure document, then you must retain existing Item 15 of your disclosure document (i.e. as it is required under the Old Code).

• You must continue to respond to Item 15 of your disclosure document in relation to any existing marketing and cooperative funds that you operate.

• All responses in your disclosure document should be current as at the date of the document.

Other things

• Discard your key facts sheet.

• Get a copy of the New Code to use for disclosure purposes.

• Update your responses on the Franchise Disclosure Register as we understand that franchisors will be required to respond to two new questions.

• Update your disclosure document when you normally would (i.e. within 4 months of the end of your financial year). See our comments in the checklist above and below explaining timing requirements for specific items.

• Continue to manage any existing marketing and/or cooperative funds in compliance with relevant requirements under the Old Code (i.e. prepare financial statements for each fund within 4 months of the end of your financial year etc).

• Franchise agreements must include a clause addressing compensation for early termination in compliance with section 43 of the New Code.

• As required by section 44 of the New Code, franchisors must not sign any franchise agreement unless the franchisee will have a reasonable opportunity to make a return, during the term of the agreement, on any investment required by the franchisor as part of entering into, or under, the agreement.

• Disclosure documents must now include all information set out in Schedule 1 of the New Code (including Items 14(1A), 14(1B) and 15).

• Franchisors must comply with sections 31 and 61 of the New Code in relation to all specific purpose funds (including existing marketing and cooperative funds) that they operate.

• Nothing stops you from complying with any aspect of the New Code before 1 November 2025.