Franchising in Canada: defining territorial rights

Turning an existing business into a franchise means answering a practical question: where will each franchisee be able to build their customer base, and what protection will they have? A promise of an ‘exclusive territory’ is not enough. To build a lasting franchise network, you need to specify the rights granted, the activities reserved for the franchisor and how sales crossing local boundaries will be handled.

1. Define what the territory actually protects

Start by distinguishing three concepts: the authorised location, the area in which customers may be actively approached, and protection against other outlets opening nearby. These may overlap, but they are not interchangeable.

For example, a franchisee may operate a shop at a specified address without enjoying exclusivity in the surrounding neighbourhoods. Conversely, a service business may be given a protected area for seeking customers without having premises open to the public.

Before drafting the agreement, record your decisions in a summary document:

• New outlets: can the franchisor open a company-owned outlet or grant another franchise in the area?
• Seeking customers: who may actively approach customers located there?
• Unsolicited enquiries: can a franchisee serve a customer from another territory?
• Scope of protection: does it cover only the same brand, particular services or particular outlet formats?

Avoid using ‘exclusive’ in a sales presentation if the agreement reserves several sales channels for the franchisor. Explain the limits of the protection as clearly as its benefits.

2. Draw boundaries based on actual operations

The territory should reflect the capacity to serve customers, not simply an area on a map. Use evidence from your existing business or pilot operation: where customers come from, travel times, delivery constraints, purchase frequency and the resources needed to meet demand.

For a mobile business, a large area may look attractive while creating unproductive travel time. For a physical shop, an administrative boundary may split its natural catchment area in two. Test several configurations before fixing the boundaries.

Prepare a dated map accompanied by a written description that can be checked. If you use postcodes, set out how changes to them will be handled. If you use a radius, specify the starting point and the measurement method. State in the agreement which document takes precedence if there is a discrepancy.

Also distinguish the territory granted immediately from any priority rights over a neighbouring area. An opportunity for future expansion must not be presented as a right already secured. Define its duration, conditions and the procedure to follow, without promising sufficient customer demand.

3. Set rules for online sales and shared accounts

Physical boundaries do not automatically resolve how online orders are handled. Before recruiting franchisees, work through an order journey: a customer discovers the brand on the national website, places an order from home and requests delivery to their workplace in another area. Who receives the order, fulfils it and records the sale?

Establish rules for the most likely situations:

• orders received through the franchisor’s website or call centre;
• deliveries and service visits outside the usual territory;
• customers with multiple locations;
• contracts negotiated nationally;
• sales made through third-party platforms.

For each situation, allocate responsibility for managing the sale, fulfilment, invoicing and after-sales service. Also specify the financial arrangements when one franchisee delivers a service sold by another participant in the network.

Test these rules using hypothetical cases before launch. A rule that is difficult to explain to a customer will often be difficult to apply between franchisees. The aim is to prevent disputes without turning every out-of-area enquiry into an improvised negotiation.

4. Align promises, the agreement and disclosure

In Canada, territorial rights must be considered alongside the applicable provincial obligations. In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 and Ontario Regulation 581/00 govern pre-contractual disclosure, among other matters. Subject to the statutory exceptions, the disclosure document must be provided at least 14 days before the signing or payment covered by the Act, whichever occurs first.

This document must contain material facts and agreements relating to the franchise. Territorial rights, their restrictions and any competing activities reserved for the franchisor therefore require careful attention. Providing a map with a verbal explanation is no substitute for a consistent contractual description.

In Quebec, there is no specific statute imposing a general franchise disclosure regime comparable to Ontario’s. The Civil Code of Québec, particularly its rules on contracts and good faith, still applies.

Have a lawyer review the territorial rules, particularly any customer or sales restrictions that could raise issues under the federal Competition Act. Also define any procedure for changing the boundaries; avoid suggesting that protection is permanent if it is conditional.

Key takeaway: before making any territorial promise, prepare a map, a precise definition of the rights and a few order scenarios. Then have these aligned with the agreement and pre-contractual disclosure.