Royalty arrears — franchisees who have fallen behind on their royalty, marketing fund, and other ongoing payment obligations — are one of the most common financial management challenges for franchisors. The challenge is not simply recovering the money: it is doing so while maintaining the franchise relationship, complying with the Franchising Code of Conduct, and avoiding the escalation of a financial dispute into a franchise dispute with broader implications.
The legal framework: the Franchising Code of Conduct
The Franchising Code of Conduct (made under the Competition and Consumer Act 2010 (Cth)) imposes specific obligations on franchisors in their dealings with franchisees. Relevant to royalty recovery are: the obligation to act in good faith, notification requirements before terminating a franchise agreement for breach, and the requirement to provide a reasonable opportunity to remedy a remediable breach before proceeding to termination.
A franchisor who skips the Code's breach and cure process and moves directly to aggressive recovery action — or to termination — may find the recovery contested and may face a claim under the Code. Following the process is both a legal obligation and a practical protection.
Early identification and intervention
Royalty arrears rarely appear suddenly. A franchisee who misses one royalty payment has usually been experiencing financial difficulty for some time. The earlier the franchisor identifies and intervenes — ideally at the first missed payment or the first payment that is significantly late — the more options are available. A franchisee whose arrears are $5,000 is easier to assist than one whose arrears are $50,000.
The initial intervention should be a private, direct conversation between the franchisor's operations or finance team and the franchisee — not a formal legal notice. The goal is to understand the cause of the arrears and to determine whether the franchise is viable. If it is viable, a structured repayment arrangement is usually the right outcome. If it is not, managed exit may be preferable to continued accumulation of arrears.
Structuring a repayment arrangement
Repayment arrangements for royalty arrears should be documented in a formal deed of agreement, confirmed with legal advice. The arrangement should specify: the arrears amount, the repayment schedule, ongoing royalty payment obligations during the arrangement period, the consequences of breach of the arrangement (typically, immediate termination notice), and whether the franchisor is reserving its rights under the franchise agreement.
When arrangements fail
If a franchisee fails to comply with a repayment arrangement, the franchisor should issue a formal breach notice under the franchise agreement and the Franchising Code. The Code requires a minimum 30-day remedy period for a remediable breach. If the breach is not remedied, the franchisor may proceed to termination — and recovery of the outstanding debt through the courts or a recovery agent.
Contact Merion if you are a franchisor managing royalty arrears — recovery in a franchise context requires understanding of the Code as well as standard debt recovery practice.