franchisor Tag

The Full Court of the Federal Court handed down a decision this year that has the potential to affect Business people who might not consider themselves involved in a franchise relationship. The decision also places in doubt the extent to which a Franchisor must go, when undertaking the process of issuing a disclosure document.  We believe that this process must be dictated by the particular circumstances of the

Riba Business Lawyers

Have you ever wondered whether licensing or franchising is the best model to grow your business?  Many people wanting to avoid the cost and regulation of franchising will consider licensing as an alternative. But is licensing your business model really an alternative to franchising? What is licensing anyway and what is the difference between a franchise and a licence?

Firstly you cannot convert a franchise to a licence simply by changing the name at the top of the document.  The label given to the arrangement has no influence over the legal effect of the arrangement.  Franchising is just a form of licensing.

Whether the relationship that you wish to establish is really a franchise or a licence can be determined only in one way.  The Franchising Code of Conduct defines certain arrangements as a franchise.  The code provides that if certain ingredients are present then a franchise exists.

It is quite common for Franchise Agreements to contain clauses which have a significant effect on the way in which the sale contract should be drafted.  If  a contract for the sale of a Franchised business is signed without first reading the Franchise Agreement and checking any requirements, then it may be difficult to unravel the resulting mess. There is a lengthy list of things that need to be checked.  If  steps are not taken to ensure compliance, then it is likely that any sale contract will be in conflict with the Franchise Agreement.  This problem can be difficult to resolve because the sale contract may oblige the seller to do one thing and the Franchise Agreement may prohibit the doing of that same thing.

There is no such thing as a standard Franchise Agreement.  However there are certain things that all Franchisors will try to control using their agreement.  This need for the Franchisor to maintain control gives all Franchise Agreements a common flavour. There is sometimes a misconception that the Franchise Agreement is designed to protect both Franchisor and Franchisee.   There is however little contained in a Franchise Agreement which is designed to protect a Franchisee and this is often a source of disappointment to the Franchisee once the documents are reviewed.  Franchisees do however enjoy significant protection given at common law, from legislation such as the Franchising Code.

The cost of preparing legal documentation to turn a business into a franchised system is between $8000 and $20,000 plus GST .  This cost may be recovered by the sale of  franchises. Once the template documents are prepared the franchisee should pay the franchisor's costs to prepare and issue the documents, as well as the cost of negotiations. We set up franchise systems for clients throughout Australia. Please contact us for an instant quote.  The task of preparing this documentation is a routine legal engagement for us however it is a lengthy process where each step in the process must be respected. We can usually provide draft franchise documentation within 2 weeks of receiving instructions.

The cost and time involved is determined by the complexity of  the system, and the extent to which the client has resolved issues relating to the workings of the system.  For example if the franchise system relates to a home or vehicle based system, then the cost is generally not much more than $8000 plus GST. When it is necessary to incorporate procedures relating to retail shop leasing then this would normally add another level of  processes and cause cost increases.

Raine & Horne Pty Ltd –v- Adacol Pty Ltd [2006] NSWSC 36

What is the effect of a restraint of trade after termination of a Franchise Agreement?

 Adacol was a  Raine & Horne franchisee at Brighton and Ramsgate in Sydney.

The franchise agreement provided:

“29.1 - The franchisee and the (guarantors) agree they will not for a period of 12 months after termination (for whatever reason) of this deed, conduct or be in any way employed or interested in any real estate agency business which carries on business substantially within a 5km radius of the premises.”

The franchisor terminated the Franchise Agreement on the basis that Adacol “voluntarily abandoned the franchise business or the franchise relationship” prior to the end of the term.

Adacol continued to operate from the same premises but instead as a Ray White franchisee.   It was a condition of the Ray White franchise agreement that franchise fees be waived until the end of the Raine & Horne term.

Look at any shopping centre in Australia and you will notice that many of the shops across many different shopping centres are the same. We see from this, the huge popularity of franchising in Australia. The need for retail premises with each of these Franchised retail stores means that decisions need to be made about who controls the premises. Should the owner of the business (Franchisee) take a lease of the premises? This means taking the direct benefit and risk associated with the lease. If the Landlord has a complaint or needs to sue for performance of the lease the first point of contact would be the lessee. If the business owner or Franchisee signs the lease then they are personally and directly responsible to the landlord. Alternatively, should the Franchisor take the lease, and then give a licence to the franchisee? This means that the Franchisor is in control of the premises. The benefit for the Franchisor is that, if there is a falling out with the Franchisee or, the Franchisee leaves the business, there is no direct impact on the lease, provided that, the Franchisor continues to honour the Franchisors obligations under the lease. I should point out that generally a Franchisor will ask for an indemnity from the Franchisee in respect of all the obligations of the Franchisor written in the lease. This is done so that the franchisee shares the same risk as the franchisor, regardless of how the premises agreement is structured.