25 March, 2020
On 14 February 2020 the Government released an Exposure Draft of changes to the Franchising Code for new vehicle dealership agreements. It has invited comments by 13 March 2020. The changes are expected to take effect on 1 July 2020, with the Government flagging that only minor revisions are likely to be considered.
The Exposure Draft is the final step in the long series of enquiries relating to the regulation of motor vehicle dealership agreements in Australia, including the ACCC's 2017 market study on the new car industry, a 2018 consultation on the Franchising Code and motor vehicle dealerships and the 2019 Parliamentary Joint Committee's "Fairness in Franchising" report on the franchising sector as a whole.
Dealer representatives had sought a standalone Industry Code for motor vehicle dealerships. This was rejected in favour of adding a new part to the Franchising Code including specific regulations for the motor vehicle sector.
Not all motor vehicle dealerships are covered
Importantly, the changes will not apply to all "motor vehicle dealerships" covered by the Franchising Code. They will apply to "new vehicle dealership agreements", being those for a dealership that predominantly deals in:
- new passenger vehicles seating up to 9 persons; and/ or
- vehicles constructed primarily for the carriage of goods and with a gross vehicle mass not exceeding 3.5 tonnes.
This means that large goods vehicles, motorcycles, motorised farm machinery, motorised construction machinery, aircraft and motorboats will not be covered by this new part of the Franchising Code. These will continue to be governed by the remainder of the Code.
The changes will apply to all "new vehicle dealership agreements" entered into, renewed or extended on or after 1 July 2020 and to all disclosure documents issued in relation to such agreements on or after that date.
The changes relate to the issues set out below:
Notice of termination or non-renewal
The Franchising Code currently requires a franchisor to notify a franchisee at least 6 months before the end of a franchise agreement term whether the franchisor intends to extend the agreement or enter into a new agreement. The Exposure Draft amends this notice period for new vehicle dealership agreements with a term of 12 months or longer to 12 months and requires the franchisee to provide the same notice to the franchisor. The non-renewing party will be required to provide the other with reasons for its decision.
The changes will also require each party to agree a written plan with milestones for managing the wind down of the dealership, including how stock (including new vehicles, spare parts and service and repair equipment) will be managed over the remaining term of the agreement and will require the parties to work together to reduce stock over that period.
The Government considered whether it was appropriate to mandate a minimum 5 year term for new vehicle dealership agreements but rejected this option. It also rejected a suggestion that a franchisor should be required to re-purchase a franchisee's remaining stock on termination.
Resolving disputes
The Exposure Draft permits two or more franchisees who have a dispute of the same nature with a franchisor to seek a multi-franchisee dispute resolution. The current Franchising Code neither prohibits nor permits this and there had been some concerns that joint mediation might raise competition law issues. The change will not force a franchisor to accept multi-franchising mediation but will allow it to be requested. The change is designed to remove any suggestion that this cannot be permitted and is consistent with the ACCC's proposed class exemption to allow franchisees to collectively negotiate franchise agreements with their franchisor.
Disclosing significant capital expenditure
The most significant change impacts the level of disclosure a franchisor will be required to provide to a new vehicle franchisee regarding "significant capital expenditure". The change has been introduced in response to concerns that disclosure of possible significant capital expenditure has been imprecise as to substance and amount. The new vehicle dealership provisions will require the franchisor to include "as much information as practicable" about such expenditure, including the amount, its rationale, timing, nature, the anticipated outcomes and benefits and the expected risks. The changes will also require the franchisor and franchisee to discuss the expenditure before entering into, renewing or extending the term or scope of the agreement and the circumstances under which the franchisee is likely to recoup the expenditure.
This additional requirement will impact the extent of a franchisor's disclosure in its disclosure document and raises new risks, as the franchisor will be required to provide representations regarding how the franchisee is likely to recoup benefits from the expenditure.
Most critically, although the Franchising Code currently prevents franchisors from requiring franchisees to undertake significant capital expenditure during the term of a franchise agreement, it may currently do so if the expenditure is disclosed in the disclosure document, is agreed by the franchisee or is expenditure the franchisor considers to be necessary as capital investment in the franchised business. The exception for expenditure the franchisor considers necessary is to be removed, so that if it cannot be agreed with the franchisee only significant capital expenditure disclosed up front will be permitted.
Not only must it be disclosed, the expenditure will only be excluded from the prohibition if it meets the requirements mentioned above: that "as much information as practicable" is included, as well as the rationale, amount, timing, nature, risks and anticipated outcomes and benefit. As franchisors may not anticipate all capital expenditure that they will require of franchisees before a franchise agreement is entered into, new vehicle franchisors may need to carefully consider the length of franchise terms and any renewal rights in new vehicle dealership agreements they enter into on or after 1 July 2020 if these expected changes are implemented.
For further information, please contact:
Jonathan L. Flintoft, Partner, Baker McKenzie
jonathan.flintoft@bakermckenzie.com
