Franchise territorial exclusivity: setting boundaries in the Czech Republic

When expanding an established business into a franchise network, it is not enough to promise a partner that they will have ‘the whole town to themselves’. You need to define exactly what you are protecting, where customers come from and how the rules will evolve as the brand grows. A well-defined territory protects the franchisee’s investment without holding back further development. This guide explains what to prepare before first offering territorial exclusivity in the Czech Republic.

1. Map demand before drawing boundaries

A municipality’s administrative boundaries may not reflect where customers actually come from. For a café, walking distance may be decisive; for repair and maintenance services, it may be a technician’s travel time; and for an education centre, public transport links. Base your decisions on verified data from your own business, rather than simply the number of residents shown on a map.

Before dividing up territories, prepare an overview of:

• where existing customers come from and how often they buy;
• how far they are willing to travel, or how far afield you can deliver the service;
• how much demand comes from businesses, tourists or commuters;
• where your existing outlets operate and how their catchment areas overlap;
• the capacity an outlet can realistically handle.

Use customer data in aggregate form wherever possible. If you process personal data, you must comply with the GDPR and Czech Act No. 110/2019 Coll., on Personal Data Processing.

The outcome should be an evidence-based territory proposal, not a promise of earnings. Separate established facts from assumptions and record the date of the assessment. This will show your partner what the proposal is based on and give you a starting point for later discussions about another outlet.

2. Distinguish outlet protection from sales restrictions

The two parties may understand exclusivity differently. A franchisor may only be promising not to open another physical outlet in the area, while the franchisee may expect rights to every customer with a local address. These are not the same thing.

In the draft agreement, distinguish in particular between:

• Outlet locations: whether you may open your own outlet in the territory or offer it to another partner.
• Customer targeting: which rules apply to targeted sales approaches and local advertising campaigns.
• Handling unsolicited enquiries: how you deal with a customer who independently contacts an outlet outside the area where they live.
• Reserved accounts: how accounts such as national corporate clients will be served if you wish to retain them at head office.

Define the territory in a way that can be verified, for example through a list of municipalities supported by a map attached to the agreement. Also specify which document takes precedence if there is a discrepancy. In growing towns and cities, allow for new neighbourhoods and changes to address boundaries.

Simply stating ‘exclusive representation for the region’ is not enough. For each right, specify whom it binds and what exceptions apply. Disclose those exceptions before signing, not when announcing a new outlet.

3. Have the rules reviewed under competition law

The Czech Republic has no dedicated franchise legislation or compulsory state registration of franchise concepts. A franchise agreement is usually concluded as an innominate contract — a contract not governed as a specific statutory type — under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. However, freedom of contract does not mean that parties can divide up customers or prohibit sales as they please.

Act No. 143/2001 Coll., on the Protection of Competition, is important for territorial arrangements. If the relationship may affect trade between EU Member States, Article 101 of the Treaty on the Functioning of the European Union also applies. Commission Regulation (EU) 2022/720 on the block exemption for vertical agreements, together with the Commission’s related guidelines, is relevant when assessing such agreements.

A crucial distinction is between active sales, such as specifically targeting customers in a particular territory, and passive sales, meaning responses to unsolicited customer enquiries. Certain restrictions on active sales may be permitted under specified conditions. Blanket bans on passive sales, by contrast, generally raise serious competition law concerns, although specific exceptions exist.

The block exemption does not automatically approve every franchise agreement. Its application depends, among other things, on market shares and the nature of the restrictions. Give your lawyer not only the agreement but also the rules on advertising, online sales and the allocation of orders. The assessment concerns how the relationship actually operates, not merely the headings given to contractual clauses.

4. Address online orders and future changes

A shared website can easily lead to disputes over who is entitled to an order. Before you start recruiting franchisees, establish who contracts with the customer, who provides the service, who receives payment and who handles complaints. Simply passing a customer’s contact details to a local partner does not resolve these questions.

Distinguish between the internal allocation of enquiries received by head office and restrictions on franchisees’ independent sales. Automatic redirection based on a customer’s address must not be used, without legal assessment, as a means of unlawfully allocating customers. Nor does a generally accessible online shop automatically constitute active targeting of every territory in which it can be viewed.

If you want exclusivity to depend on performance, set out measurable obligations within the franchisee’s control, the assessment method and an opportunity to remedy shortcomings in advance. Take account of obstacles arising on head office’s side, such as supply disruptions. Boundary changes should not come as a surprise unilateral decision: the agreement should define the consultation process and the conditions for any change.

Practical takeaway: Before offering your first exclusive territory, prepare a map, a list of protected rights and rules for online orders. Review all three together. Keeping them consistent helps prevent disputes within the franchise network.