Changes to the the Franchising Code affecting motor vehicle dealers

Sep 5, 2021

Do you operate a motor vehicle dealership? Changes to the Franchising Code of Conduct may have a significant impact on your Dealership Agreement.

On 1 July 2021, the Australian Government introduced significant changes to the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Franchising Code). These franchisee-friendly changes were introduced to address the power imbalance (whether perceived or actual) between franchisors and franchisees in Australia by enhancing the disclosure obligations of franchisors, and strengthening the franchising dispute resolution and complaints handling provisions of the Franchising Code in favour of franchisees.

Impact on motor vehicle dealers

A number of the changes relate specifically to new vehicle dealers (franchisees), being dealers that deal predominantly in new passenger vehicles or new light goods vehicles (or both), and may impact their New Vehicle Dealership Agreements in two significant ways:

  1. All New Vehicle Dealership Agreements must provide for compensation for early termination of a New Vehicle Dealership Agreement due to certain acts of the franchisor; and
  2. All New Vehicle Dealership Agreements must provide the dealer with a reasonable opportunity to make a return on any investments required by the franchisor.

These changes will only impact New Vehicle Dealership Agreements that have been entered into, extended or renewed after 1 July 2021.

Early termination

New Vehicle Dealership Agreements must include provisions which provide for compensation for the dealer if the New Vehicle Dealership Agreement is terminated before expiration because the franchisor:

  • withdraws from the Australian market;
  • rationalises its network; or
  • changes its distribution models in Australia.

These provisions must include how the compensation is to be determined, with specific reference to lost profits from direct and indirect revenue, unamortised capital expenditure requested by the franchisor, loss of opportunity in selling established goodwill and costs of winding up the franchised business.

New Vehicle Dealership Agreements must also include provision for the franchisor to buy back or compensate the dealer for new road vehicles, spare parts and special tools if the New Vehicle Driver Agreement is terminated before expiration in the circumstance outlined above, or the New Vehicle Dealership Agreement is not renewed and a new agreement is not entered into.

Return on investment

New Vehicle Dealership Agreements must also provide the dealer with a reasonable opportunity to make a return, during the term of the Agreement, on any investment that is required by the franchisor as part of the Agreement.

What this means is that the term of the Agreement must be long enough to provide the dealer with a reasonable opportunity to make a return on their investment and if the required expenditure is disclosed in the disclosure document, the manufacturer (franchisor) must discuss with the dealer whether that expenditure is likely to be recouped.

What now?

If you are considering entering into a New Vehicle Dealership Agreement or renewing an existing one, it is important that you understand the changes to the Franchising Code, and that the mandatory provisions outlined above are incorporated into your agreement.