New Vehicle Dealership Agreements – What’s changed in the Franchising Code of Conduct?

Corporate & Commercial 4 September 2020

The Franchising Code of Conduct (“the Code”) has recently been updated to add Parts 5 and 6 which deal specifically with new vehicle dealership agreements.  Car dealerships who operate through a franchise agreement should be aware of the new provisions which provide them with additional protections.  Franchisors who grant new vehicle dealership agreements must ensure they comply with these new requirements.

A ‘new vehicle dealership agreement’ is defined as a dealership agreement that predominantly deals with new passenger vehicles or new light goods vehicles (or both).  New vehicle dealership agreements which were entered into prior to 1 June 2020 are still governed under the previous requirements of the Code.  However, any new agreements entered into (or any old agreements which are renewed or extended) on or after 1 June 2020 are now governed by Part 5 and Part 6 of the Code.

The amendments to the Code provide franchisees operating pursuant to new car dealership agreements with additional protections.  Franchisors and franchisees should be aware of the following changes:

1. What notice needs to be provided before the agreement expires?

Part 5 and 6 of the Code put obligations on both franchisors and franchisees to notify each other of their intentions regarding the expiry of the new vehicle dealership agreement, specifically whether they intend to renew the agreement, enter a new agreement or whether the agreement will end and the franchisee will cease operating the business upon expiry.   This notice must be provided in writing at least 12 months before expiry of the term of the agreement (except for agreements which are for a term less than 12 months which only require 6 months’ notice, or agreements less than 6 months which require 1 months’ notice).

If the franchisor does not intend to extend the agreement or enter a new agreement, the franchisor’s notice must include the reasons behind this decision.

If a franchisor fails to give the required notice, or the reasons for a refusal to renew or enter into a new agreement, a penalty of up to $66,600 may be imposed on the franchisor.

2. What do we need to do if the agreement is not being renewed?

Where either party notifies the other that they do not intend to renew the agreement or enter into a new agreement, both parties must agree to a written plan to manage the wind down of the dealership, including addressing how new vehicles, spare parts and other stock will be managed over the remaining term of the agreement.  The Code places an obligation on both parties to cooperate to reduce the franchisee’s stock of new vehicles and spare parts over the remaining term of the agreement.

3. When can a franchisor require a franchisee to incur significant capital expenditure?

Whilst franchisors of both new vehicle dealership agreements and other franchise agreements are only permitted to request franchisees undertake significant capital expenditure in the specific circumstances set out in the Code, additional requirements are placed on franchisors of new vehicle dealership agreements where they require franchisees to incur such expenditure.

Franchisors of new vehicle dealership agreements can no longer require franchisees to undertake significant capital expenditure based on the franchisor’s view that such expenditure is necessary as a capital investment in the franchised business.  Unless the expenditure is consented to by the franchisee or a majority of franchisees, or required to comply with legislative obligations, a franchisor must:

(a) disclose the capital expenditure in the disclosure document provided to the franchisee before the franchisee entered into the new vehicle dealership agreement (or a renewal of the agreement);

(b) include in the disclosure document, the amount, timing and nature of the expenditure and the reason for the expenditure, as well as the anticipated outcomes and benefits and risks of the expenditure; and

(c) discuss the expenditure with the franchisee before the agreement is entered into or renewed.  The parties must discuss the circumstances under which the franchisee considers that the franchisee is likely to recoup the expenditure having regarding to the geographical area of their new car dealership.

4. What if there are disputes in relation to more than one franchise agreement?

The amendments allow franchisees to new vehicle dealership agreements to request the franchisor deal with disputes of the same nature together.  This applies to a franchisee who has more than one new vehicle dealership agreement, or two separate franchisees operating different sites, provided the nature of the dispute is the same.

Whilst the changes to the Code only affect new car dealership agreements, all franchisors should be aware of the need to update their disclosure document to incorporate the new Code, ensuring that the current version of the Code is issued with all new Disclosure Documents.

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