Legal Aspects of Franchising in New Zealand

Franchising is a mixed picture in New Zealand in the middle of 2010. Many well established systems are coping well in the rather subdued atmosphere that exists after last year’s recession. However, a small number of franchise systems are performing poorly, either because they are badly run or they do not have the right product range to remain sustainable. There is a notable lack of buyers for businesses generally in New Zealand notwithstanding that the banks have money to lend but it is expected that buyers will re-emerge as confidence in the economy grows and the general feedback from surveys is that confidence is indeed on the increase.

Several new franchise systems have entered the market this year. Food retailing is one example where systems have continued to evolve. The competition between franchise coffee shop operators remains intense and consumer spending is still subdued. Later this year (1 October) GST will increase from 12.5% to 15% on goods and services which may have a small impact on consumption but it is generally predicted not to have any significant effect. To coincide with the increase in GST the government will be lowering personal income taxes from 1 October.

Massey University, in conjunction with Griffith University is conducting a study of the more than 600 franchise systems existing in New Zealand. The Franchise Association of New Zealand (“FANZ”) is working in closely with this study. The study is looking at a range of measures including:

• the number of business format franchisors
• the number of franchisee units
• growth rates since 2003 (when the last summary occurred)
• the number of people employed in business format franchise organisations
• an estimation of turnover of the entire sector
• numbers of home grown franchise systems
• extent of international expansion
• trends
• operational practices and number and types of disputes
• measure of franchisors’ confidence in the business and national economy.

About 136 franchisors are members of the FANZ and all the usual hallmarks of franchising in Australia apply to membership of the FANZ, e.g. a cooling off period, disclosure document, a code of practice (found on the FANZ website) www.franchiseassociation.org.nz and compulsory mediation. The FANZ is a successful advocate for maintaining high standards for franchising.

There is a useful survey now being run on a quarterly basis by Franchize Consultants called the Franchising Confidence Index. The survey contains up to date information about franchising in New Zealand and can be accessed on www.franchisingconfidence.co.nz or via the website of Franchize Consultants which is www.franchize.biz.

Over recent years there has been a growing body of case law dealing with franchise disputes. Such disputes have covered misrepresentations made by franchisors, wrongful termination of franchise agreements, orders both upholding restraints of trade and defeating restraints and other issues such as the enforcement of guarantees. Two decisions have involved circumstances where the franchisee was unsuccessful over alleged misrepresentations. These decisions should be treated with some caution as there are a number of lawyers who consider that the notwithstanding the decisions, disclaimer clauses and independent advisers do not remove the onus for franchisors to make careful comments to prospective franchisees.

For an Australian franchisor coming into New Zealand it is a relatively straight forward process from a legal point of view. Most systems that come into New Zealand from Australia set up a local company both to protect intellectual property in New Zealand as well as to ensure a “foothold” in New Zealand.

It is important to get trade marks registered in New Zealand as early as possible. It is not an expensive process but should be considered well before actually arriving in New Zealand.

If the Australian franchisor is operating directly in New Zealand then the franchise agreement should be made subject to New Zealand jurisdiction for ease of franchise rights enforcement. Reputable Australian systems that come across here ensure that they have a disclosure document that is relevant to New Zealand circumstances as well as a cooling off period etc. A number of Australian systems have made as a key feature of setting up in New Zealand an early application to join the FANZ. It certainly enhances the reputation of the system operating in New Zealand. Obviously, if a Master Franchisee is appointed in New Zealand then having that franchisee become a member of the FANZ is likely to be perceived as a system which respects the maintenance of high standards.

The FANZ has made special efforts to promote best practice in a variety of ways. It has promoted itself through a well organised website. The logo of the FANZ appears on all the advertisements of its members. It is active in having a presence at business and franchise expos (held at Auckland, Wellington and Christchurch annually) and wherever possible it promotes its cause through feature articles in magazines and newspapers.

In spite of a minority of lawyers and accountants seeing franchising as something akin to the Wild West, the big majority of lawyers, accountants and business brokers throughout the country have a reasonable understanding of franchising and the benefits it can bring to franchisees. There are a growing number of lawyers, accountants and business brokers who specialise in franchising. There is still a good deal of education to be undertaken for the public about avoiding shonky or doubtful franchise systems but the trend is for specialised business brokers to promote healthy systems and to steer people away from the moonlight operators.

The majority of the banks in New Zealand now have a strong presence in the franchise industry and bear in mind that all the major banks in New Zealand are Australian owned. There are reputable franchise consultants in New Zealand with well established track work records and for anyone who attends the annual FANZ conference it is manifest to observe that there is a strong and proactive congeniality within the franchise industry in New Zealand.

There are a small number of dedicated and respected franchise consultants in New Zealand who can be invaluable in modifying systems coming into this country. Involving their use can considerably diminish the likelihood of a legal claim being brought against a franchisor coming across from Australia.

The unemployment rate in New Zealand is presently about 6% and is expected to decline slightly over the next year. A recent survey indicates that employers are becoming more optimistic about engaging staff again.

Be aware that employment laws in New Zealand are similar to Australia and dismissing staff is not an easy process. Also New Zealand has an act called the Resource Management Act which, coupled with the Building Act, means that obtaining building consents for shop fitouts can be slow and expensive. It is vital to stress the need to do plenty of homework.

Obtaining sound taxation advice is essential before coming into New Zealand. There is a withholding tax system for payment of royalties and other fees from New Zealand to Australia but there is plenty of advice available from accountants who understand the taxation laws between the two countries.

It is important to remember that GST applies to everything in New Zealand (even food items) and the tax structure here is somewhat different from Australia. For a start there is no such thing as stamp duty. Recently, the government introduced a Kiwi Saver superannuation scheme which requires contributions from employers to be made when employee have payments occur.

It is also important to know that we have the Personal Properties Securities Act which is a system of an on-line registration of all charges (e.g. what used to debentures for companies) against both individuals and companies as security for moneys lent and where goods and services are supplied on credit.

We are yet to see retail leasing legislation. There is a good case to introduce such legislation in New Zealand as the behaviour of some of the large shopping centre owners is somewhat greedy Leases are typically for 6 years with a right of renewal of six years.

There are many success stories for Australian systems entering into New Zealand such as Muffin Break, Brumbys, Baker’s Delight, and Civic Video etc. A point to remember is that the disposable income of Kiwis is not quite the same as that of Aussies. Having said that, the lifestyle differences between Australia and New Zealand are not significant and so long as the homework and planning are done carefully then there are good prospects for Australian systems to enter into New Zealand and becoming successful.

---
This article was written for Business Franchise Guide 2011 and is reprinted here with permission.