The new Franchising Code of Conduct 2025 – 11 changes franchisors should know

Important changes to the Franchising Code of Conduct (the Code) are set to take effect next month.  This publication looks at fundamental aspects of the current law, as well as what will change from Tuesday, 1 April 2025.

When does a franchise arise?

The new Code does not change when a franchise will arise.  Under the current and new Code, a business arrangement is a franchise to which the Code applies when three key factors appear:

The Code applies to all manner of franchises, including vehicle dealerships which are addressed separately in the Code.  However, it does not apply to franchises governed by certain other industry Codes such as the Oil Code of Conduct.  Additionally, there is a carve out for some specific business relationships where the franchisee’s supply of the franchised goods will not exceed 20% of the franchisee’s business.  These exclusions have important technical requirements, so it is important to review the Code when deciding if a business arrangement can be excluded from the application of the Code.

How have franchisor’s obligations changed under the new Code?

The main obligations of franchisors have not materially changed, but some procedural changes have been made.

The following has not changed:

Key changes to the Code and their impact are: 

Section 44 of the new Code introduces an obligation that all franchise agreements must give franchisees a reasonable opportunity to make a return, during the term of the agreement, on any investment required by the franchisor.  This obligation previously existed for vehicle dealerships only.

Franchisors will not be required to guarantee profits or success for franchisees, nor be responsible for protecting the business from risks.  Franchisors providing earnings information should ensure that the earnings information takes into account reasonable risks and expenses to demonstrate a reasonable return on investment and outlines any clear variables.   

However, beyond this, the law doesn’t stipulate what rate of investment will be considered sufficient.  Additionally, there will be expenses, such as lessor expenses under leases, and certain types of possible returns, such as tax concessions, that could be personal to the franchisee and difficult for the franchisor to include in its assessment. 

The obligation to provide a Key Facts Sheet has been removed and these documents are now unnecessary.

Additionally, franchisees who previously entered into a similar franchise agreement with the same franchisor for the same or similar business will be able to:

The 14 day disclosure period (now renamed the ‘consideration period’) will still apply even to franchisees who opt out of disclosure. In such case, the period will commence from receipt of the draft franchise agreement and lease information (if applicable).

The new Code clarifies the position regarding signing of documents during the consideration period by removing reference to ‘entering into’ the franchise agreement and simply stipulate that the franchisor must not sign the franchise agreement during the consideration period.  This means that it will be possible for franchisees to sign the franchise agreement and return it in time for signing by the franchisor on conclusion of the 14 day disclosure period.    

The Code requires the disclosure of additional information, in particular, the requirement to state if the franchisee may be required to incur ‘significant capital expenditure’ during the course of the franchise and if so then the rationale, amount, anticipated outcomes and expected risks of the significant capital expenditure.  It follows that franchisors may be pressed to require significant capital expenditure by franchisees if it was not disclosed in the Disclosure Document. 

Franchisors will also be required to disclose proceedings and certain breaches of the Fair Work Act 2009.

The Code does not require the disclosure of franchisee names except those relating to terminated or transferred franchises (and only if available).  Consequently, a franchisor should have the approval of franchisees to include their details if a Disclosure Document.

Under the new Code, franchisors will be required to formally notify former franchisees of their right to have their details excluded and allow at least 14 days response period before including the former franchisee’s details in later versions of the Disclosure Document. 

The new Code clarifies when a franchisor may not enforce a restraint of trade on a franchisee, which is when all of the following elements are satisfied:

Under the new Code, it will be an offence for franchisors to enter into a franchise agreement with a contravening restraint of trade provision or to enforce/rely on a contravening restraint of trade provision.  Franchisors should therefore adjust their franchise agreements to reflect the wording of the Code, rather than risk misinterpretation. 

The new Code will introduce the following addition grounds for termination by the franchisor on seven days’ notice:

Additionally, under the new Code, the stay of termination of 28 days in case a dispute is filed will not apply for the following seven-day termination provisions:

A franchisee can only require urgent alternative dispute resolution (ADR) for certain terminations that involve a subjective finding about the conduct of the franchisee such as:

The Code permits franchise agreements to contain a term whereby the franchisor may end the franchise early without breach of the franchisee.  However, section 43 of the new Code will require franchisors to provide compensation to the franchisee if the franchise agreement is terminated early by the franchisor in order for the franchisor to:

‘Rationalise its network’ is not defined, but it might capture franchisors wanting to regain territories for operation of corporate stores.

The agreement will need to specify how compensation will be determined by the franchisor, with specific reference to lost profit from direct or indirect revenue, unamortised capital expenditure requested by the franchisor, loss of opportunity in selling of goodwill (if applicable) and cost of winding up of the franchised business.

Additionally, the franchise agreement must require the franchisor to buy back all outstanding stock and any specialised or branded equipment or other products that cannot be repurposed. 

Franchise agreements that contain options for the franchisor to buy the business or assets of the franchisee will need to be reviewed to ensure that the relevant provision operates with the same or better outcome than required under the Code.

Marketing and cooperative funds are now jointly referred to as ‘specific purpose funds’. The new term will also cover any other contributions specified in the franchise agreement as required for a specific and common purpose meaning that a franchisor may be required to set up additional funds than previously required.
Additional specific purpose funds will be subject to the same reporting obligations as marketing and co-operative funds to:

The new Code specifies that if a fixed sum is payable for the franchisor’s legal costs related to the franchise agreement, that amount must be stipulated in the agreement, must be stated as being for the franchisor’s costs of legal services relating to preparing, negotiating or executing the agreement, must not exceed reasonable and genuine legal costs and must be stated not to include the cost of legal services after the agreement is entered into.

The new Code increases the obligations of franchisors that will attract civil penalties. This includes penalties for:

The maximum penalty under the Code is 600 units, which currently equates to $198,000 per contravention.

Under the new Code, the Australian Small Business and Family Enterprise Ombudsman will be able to publicly name franchisors who do not meaningfully engaged in the ADR process or improperly withdraw from the ADR process.  This will be in addition to existing penalties that apply for failing to comply with ADR obligations.

Transition to the new Code

The new Code will apply to all new franchise agreements signed after 1 April 2025 and any renewals, transfers or extensions of existing franchise agreements which occur after this date.

Agreements that were signed on or before 31 March 2025 continue to be subject to the old Code, until renewed, transferred, extended or when otherwise terminated.

However, there is some carve outs:

Additionally, Disclosure Documents issued on or before 31 March 2025 under the old Code obligations remain compliant and do not need to be updated to the 2025 standard, even if the franchise agreement is signed after 31 March 2025.  Of course, the franchisor must update its Disclosure Document by 1 April 2025 and then again on its next scheduled review, which for most franchisors will be October 2025.

Future reviews

The Code will undergo a review every five years to ensure that it remains effective and fit for purpose. The next review will be in 2030.