Australia’s Franchising industry has been far from immune to the already significant impacts of the COVID-19 Pandemic. In fact, franchises in the food and retail sector are likely to be amongst some of the hardest hit by the economic impact.
With this said, small business franchisees who are part of a dynamic and agile franchise system may be better off than they would be going it alone.
There are any number of points of significance for franchisees and franchisors alike to consider during this time.
- Does your franchise agreement contain a force majeure clause? If so, both parties’ obligations might be ‘paused’ - but the devil is in the detail. You can read more about force majeure clauses in my recent article Contracts and COVID-19: What you need to know about force majeure.
- Are franchise fees fixed per week/month/quarter, or are they a percentage of gross sales? If it’s a percentage of gross sales, is there a ‘floor’ amount that must be paid if sales don’t meet a particular threshold?
Similarly, if you have turnover targets that you are required to meet, will they be suspended? The answers to these questions will all depend on a careful review of the franchise agreement.
- Terminating a franchise agreement for breach can only be done in accordance with the Franchising Code of Conduct (‘FCC’). In basic terms, unless ‘special circumstances’ apply, a franchisor must:
a) tell the franchisee that they are in breach;
b) tell the franchisee what they have to do to fix the breach; and
c) allow the franchisee a reasonable amount of time to do that.
What is seen as ‘reasonable’ depends on the circumstances at hand. During the COVID-19 Pandemic, ‘reasonable’ could mean significantly more time than usual.
- Many retail leases require a tenant to remain open at certain times, subject to law. The types of businesses that are legally allowed to stay open is changing by the day. Holman Webb will continue stay on top of these changes as much as possible (and we advise businesses to do the same), as it could be a question of degree as to whether a franchise is legally allowed to remain open - as opposed to remaining open subject, to space restrictions.
Some business may not be able to stay open at all (for example gyms) - whilst others can stay open, but will be required to change the way they do things (like a café only providing takeaway services).
Additionally, if the franchise owner wants to convert its business in order to adapt to changing regulations (for example, from a pub to a bottle shop), the switch may need the landlord’s consent. In saying that, Holman Webb expects laws to be passed in the near future which will significantly restrict commercial landlords from terminating leases on certain grounds.
Even with this in mind, whoever holds the lease should approach the landlord as early as possible in order to enter into commercial discussions regarding how to move forward during this time (and beyond).
- If the franchise employs staff, what are the options for potential paid/unpaid leave? Prior to COVID-19, underpayment in franchising was a huge issue. It will be critical to make sure that franchise employees at all levels are dealt with in accordance with their applicable award, agreement and the law.
- Under the FCC, each party to a franchise agreement must act in good faith towards the other. Whilst ‘Good faith’ is not defined in the FCC, it does provide that parties should act honestly and cooperatively to achieve the purposes of the agreement.
So, could requirement to act in ‘Good faith’ extend to not terminating a franchise unless the franchisor has no practical alternative?
Realistically, this will depend on the circumstances of each case, the nature of the breach and how much control the franchisee has over fixing it - although it is something that must be considered in all dealings within the franchise system.
- Many franchise agreements will include a specific obligation on franchisors to provide franchisees with assistance, training and advice. Now, more than ever, franchisors should be proactive about meeting such obligations, whilst bearing in mind the human consequences of what is happening.
If you have a query in relation to any of the above points, or you have questions surrounding how the current situation has or will affect franchise systems and owners, please don’t hesitate to get in touch with Holman Webb’s Franchising and Retail team today.