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Franchising is one of the most popular ways of expanding your business in New Zealand. This is because you do not need to pool your own debt or equity, as your franchisee takes on the brunt of the costs. All you need to have is a functioning business model that you are willing to licence. The franchise agreement is a legal document that will state the relationship between the franchisor and the franchisee. When a franchisee buys a franchise, they will sign the franchise agreement with the franchisor. This agreement may contain a cooling-off period. This article will outline: 

  • what a cooling-off period is; and 
  • how it might affect you.

What Is the Cooling-Off Period?

A cooling-off period is a length of time that is stipulated in a franchise agreement in which the franchisee can decide to withdraw from the agreement after signing it. It means that a franchisee can get their money back if they decide that they do not want to be a part of the franchise. Even though it allows franchisees to withdraw from an agreement, it should not be used as a safety net. This is because disputes are commonplace where cooling-off periods are concerned. The terms of the period and when it applies depends on how the agreement is formed.

When Does it Apply?

There is no franchise-specific legislation in New Zealand. As such, there is no stipulation that a cooling-off period has to be included. However, most agreements will have one. Further, if you are a member of the Franchise Association of New Zealand (FANZ) then you must include a cooling-off period. It is required by the FANZ Code of Practice to be included in all franchise agreements. The code of practice states that the cooling-off period must be for a minimum of seven days from when the franchisee enters into the agreement. 

If a franchisee activates the cooling-off period, then they are immediately unbound from all the provisions of the franchise agreement other than those relating to the provision of intellectual property. This is to make sure that any branding of the franchise cannot be ‘taken’ by the franchisee after withdrawing from the agreement. 

Cooling-off periods only apply to new franchise agreements. They do not apply to:

  • renewals;
  • assignments; or
  • extensions.

What Are the Costs Involved?

Your franchisee may have spent money on things such as goods and training. You may not have to refund everything that your franchisee has spent if they invoke the cooling-off period. Your franchise disclosure document will outline the specifics of what will be refunded. However, it is likely that you will only be required to refund the initial cost of the franchise and any extras related to that. 

What Else to Be Aware of

Restraint of Trade

It is likely that if you have a restraint of trade clause, it will still apply if the cooling-off period provision is activated. This means that the franchisee will not be able to either open or buy a business:

  • in the same industry; 
  • in the same location; or
  • both.

Intellectual Property

Your franchisee will also be banned from using any of your intellectual property for their own purpose. They will also still be bound to keep any confidential information to themselves.

Key Takeaways

Franchising your business is a useful way to expand your business in New Zealand. However, if you are a member of FANZ, then you will be required to add a cooling-off period provision to your agreement. Even if you are not a member of FANZ, your franchisee may still insist that you add a cooling-off period. The cooling-off period allows your franchisee to withdraw from the franchise agreement within seven days of signing the agreement. However, it may not always apply, and there could be continuing obligations that the franchisee must uphold. This could include restraint of trade clauses or intellectual property requirements. If you need any legal assistance with franchising, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Do I have to add a cooling-off period to the franchise agreement?

You are only required to add a cooling-off period if you are a member of FANZ, as it is a requirement of their code of conduct.

How long does the cooling-off period have to be?

FANZ requires a minimum of seven days, but it can be as long as you like.

Will the franchisee get all their money back?

They will be refunded for the cost of the franchise, but anything else they receive will depend on the franchise disclosure document. 

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