Without expert advice, franchising can be risky business so it is important to be aware of the possible risks associated with the process prior to entering into a franchising agreement. Miles Heffernan, an industrial advocate notes, "Franchises bankrupt many small business owners, which is why it is important to get expert advice before risking your life savings."
According to the Australian Competition and Consumer Commission (ACCC), there is no guaranteed legal protection for those who do not receive adequate advice and sign up to a bad deal. It is important to understand both your rights and responsibilities as a franchisee and franchisor and take the time to understand all documentation and information provided to you.
Recently, there have been some cases before the courts highlighting the plight of franchisees when they are not fully aware of the risks associated with entering into a franchising or occupancy agreement. It is essential that both franchisees and franchisors understand their rights, particularly when it comes to essential terms such as increases in rent and refurbishment costs.
Increases in rent are often a point of dispute between a franchisee and a franchisor, particularly at times of lease renewal. At this time, increases are generally driven by market forces. Franchisees should be prudent and always conduct their own due diligence prior to entering a franchise agreement in order to negotiate the terms of the lease with transparency.
Depending on the terms of the occupancy agreement that the tenant has entered, they may have no choice when it comes to an increase in rent. It is important that there is an option on the lease renewal about the implications of market forces on the amount of rent to be paid. Furthermore, if the occupancy agreement is governed by retail leasing legislative framework, then there may be an opportunity for a market review to follow the rules set out in the legislative regime. The Franchising Code does provide some protection for franchisees and franchisors; however, it is crucial that both parties obtain independent legal advice before entering into an occupancy agreement.
Another big, costly issue for franchisees is related to refurbishment costs throughout the duration of the agreement. Generally, the occupancy agreement will require a franchisee to refurbish the premises at relevant points in time. Where refurbishments to the shop or premise are required, the franchisee will take responsibility for the premises at their own expense. It is our experience, that it is simply unrealistic to expect a landlord not to require a refurbishment of the premises at some point particularly if the premises are situated in a major shopping centre. It is therefore important that prior to entering into any occupancy agreement that a franchisee carefully looks at the agreement to ascertain exactly what is required in terms of refurbishments – both in terms of the work that is required and the time frame. This information can sometimes be obtained via a fit-out guide that shopping centres provide.
Further, discussions may also need to take place between the franchisee and franchisor to see if the requirements or refurbishment coincide with what is required under the franchising arrangements i.e. the rebranding that may be required which may happen before or shortly after the scheduled refurbishment and the specifications of such requirements that may clash with what is negotiated under the franchising agreement. Having a transparent relationship with your franchisor can allow for more effective negotiations and ultimately, it always goes back to asking the right questions.
Why come to Coleman Greig?
It is imperative that before entering into an occupancy agreement or franchising agreement, that a franchisee carefully reviews the terms and conditions of the agreements and fully understands the related financial and legal obligations. This is in addition to a thorough review of the franchising agreement and other related documentation that is required of the franchisor.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.