The April 2025 Changes to the Franchising Code of Conduct

  The April 2025 Changes to the Franchising Code of Conduct

Part One

This article was originally intended to be a brief summary of those changes to the Franchising Code of Conduct (“the Code”) that were introduced on 1 April 2025. During our review of these changes, with a little breathing room in time, it was quickly decided that at least two parts would be required to give proper justice and thought to the amendments to the Code.

Though we say “amendments to the Code”, this new Code is, essentially, a remake, being able to be differentiated before and after with certainty due to a new numbering system, order of topics and changes extending beyond the more usual ‘addition of sub-sections approach’.

This first part will concentrate on those changes that we believe are largely aimed to increase protections for franchisees for specific circumstances that have come to pass since the initial implementation of the Code. These circumstances may not have initially been planned for or anticipated, and upon their happening may have caused an imbalance of power necessitating redress.

The next of our articles on the topic will detail some of the changes to mechanics and the logistics of documentation and accounting principles for franchisors.

Restraint of Trade

By way of the new Section 42, a franchisor is now prohibited from entering into a franchise agreement that contains a restraint of trade provision that would apply if a number of provisos are met, but essentially, if the agreement contained an option to renew or extend the agreement and the franchisor did not renew or extend the agreement.

This is a particularly specific addition to the Code and does feel as a reaction to a factual circumstance having occurred where a restraint of trade was used in a less than conscionable manner.

This new Section 42 applies to all franchise agreements that were entered into, transferred renewed or extended on or after 1 April 2025.

Early Termination Compensation

The new Section 43 is relevant to all franchise agreements that are not new vehicle dealership agreements.

By way of Section 43(2), 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

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

Pursuant to the new sections 43(3) and (4), franchisors are prohibited from entering into a franchise agreement unless the agreement requires the franchisors to buy back or compensate the franchisee for specific equipment or items purchased by the franchisee, in the event the franchise agreement is terminated before its expiry date under certain circumstances. These specific items and equipment are:

• Outstanding stock purchased by the franchisee that was specified by the franchisor and required to operate the franchise; and
  

• All essential dedicated 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.

There is a grace period for franchisors in the implementation of these provisions, with them applying to all franchise agreements that are entered into, transferred, renewed, or extended on or after 1 November 2025.

Reasonable Return on Investment

An interesting new provision is that contained in the new Section 44. Again, with a grace period and applying from 1 November 2025. 

This Section provides a positive obligation that a franchisor must not enter into a franchise agreement unless that 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.

What the extent of this obligation emplaced on franchisors is, naturally, yet to be tested.       

Moving Forward

As always, complex contractual agreements are not a one size fits all situation, all contracts have their own nuances and specificity and individual legal advice should be sought by experienced practitioners prior to entering into any new commercial agreement, particularly franchises.

Disclaimer: This article is for general understanding and should not be used as a substitute for professional legal advice. Any reliance on the information is strictly at the user's risk, and there is no intention to create a lawyer-client relationship from this general communication.