Franchise Territory Protection in Hong Kong: Clarify Exclusivity and Online Orders Before Signing

When a franchisor promises that “this area is yours”, it may simply be approving a trading address rather than undertaking not to open further outlets. In Hong Kong’s franchise market, physical shops, food delivery platforms and online shops can all reach the same customers. Before buying a franchise, establish whether you are acquiring permission to operate at a specified location or territorial protection with clear boundaries, a defined term and agreed remedies.

1. Distinguish permission to open from territorial exclusivity

A shop address in the agreement usually establishes only where you may operate. The address alone does not mean the franchisor cannot open another outlet nearby. “Exclusive”, “priority” and “protected territory” may also confer different rights, so read the specific restrictions and exceptions carefully.

Ask the franchisor to confirm each of the following:

• Exclusive operating rights: Do the restrictions cover company-owned outlets, other franchisees and outlets operated under the same brand by affiliated companies?
• Priority negotiation rights: If an opportunity for a new outlet arises nearby, do you merely get the first chance to negotiate, or do you have the right to take it on under specified terms?
• Site approval: Is approval limited to that particular premises, with no territorial protection?
• Channel exceptions: Are shopping centre concessions, pop-up shops, mobile sales outlets and online sales unrestricted?

Do not rely solely on assurances such as “we never let our franchisees compete with one another”. Turn those promises into contractual obligations, specifying who must comply, what is protected and when protection takes effect. If the promise involves affiliated companies, clarify how the franchisor will ensure they comply with the arrangements.

2. Define the boundaries with a map and a list

Terms such as “nearby”, “in the same area” or “within walking distance” invite disagreement. Opposite ends of the same street may serve different catchment areas, while shops on different floors of the same shopping centre may compete directly for the same customers. Ideally, attach a map showing the boundaries to the agreement and supplement it with streets, street numbers or a list of specified properties.

If protection is based on distance, specify the starting point, whether the measurement is in a straight line or along a walking route, and which plan or data source determines it. The agreement should also explain how to treat shopping centres that straddle a boundary, shops inside MTR railway stations and future developments, rather than leaving each party to interpret these issues after opening.

Before paying, ask the franchisor for details of existing outlets within the protected territory, approved shops that have not yet opened and operating rights already promised to others. For plans that are not yet finalised, ask for their current status: “there are no shops there at present” is not a long-term guarantee.

Also check whether the protection lasts for the full term of the franchise agreement. If relocating, temporarily closing or changing the outlet format would end that protection, agree the notification, approval and reinstatement procedures in advance. Do not assume existing rights will automatically transfer to a new address.

3. Address online shops, deliveries and cross-territory orders separately

Exclusivity for a physical outlet does not necessarily cover online orders delivered to addresses within its territory. Even without another outlet of the same brand nearby, the franchisor may still serve local customers through a central kitchen, an online shop or deliveries from other outlets. Online channels therefore require more than a map.

Start by listing channels such as the brand’s website, app, third-party food delivery platforms and corporate group orders. For each, establish who receives the order, who fulfils it and how revenue is allocated. For example, if a customer orders through the franchisor’s website and chooses to collect from your shop, do you receive a handling fee? Is the franchisor’s supply to businesses within your territory a permitted contractual exception? Can other franchisees run geographically targeted advertising within your protected area?

These arrangements should reflect what the systems can actually do. If the franchisor cannot allocate orders by address, do not rely on a promise that “they will automatically be assigned to you in future”. You can negotiate regular allocation reports, deadlines for resolving order disputes and alternative arrangements where system limitations prevent the intended approach. Reports should use aggregated data to avoid unnecessarily obtaining customers’ personal information merely to check territorial revenue.

4. Set out protection conditions, change procedures and legal limits

Hong Kong has no franchise-specific legislation, generally applicable statutory franchise disclosure document, franchise registration regime or mandatory franchise code. Territorial exclusivity is not an automatic statutory right for franchisees; it depends primarily on the parties’ agreement. Contractual and common law principles, the Misrepresentation Ordinance and other relevant laws may still apply. If false statements about territorial protection are made during recruitment, liability must be assessed against the specific evidence and applicable legal requirements.

Territorial and sales restrictions may also engage the First Conduct Rule under the Competition Ordinance. Exclusive arrangements are neither automatically unlawful nor automatically exempt: they need to be assessed in light of their terms, market conditions and effects on competition. In particular, do not privately agree with other franchisees to divide territories or customers simply to avoid competing for business. Have the relevant provisions reviewed by a lawyer familiar with Hong Kong competition law.

If protection depends on minimum sales, specify the calculation method, assessment period and consequences of missing the target. Address circumstances such as stock shortages, refurbishment or failures in the franchisor’s systems. Seek written notice and a reasonable period to improve performance, rather than losing all protection immediately after a single missed target.

Finally, specify what information the franchisor must provide when proposing additional outlets, how much advance notice is required and what remedies apply if it breaches the protection. Fee adjustments, ending the non-compliant arrangement or exit options must all be negotiated and written into the agreement; they are not automatic rights.

Practical takeaway: Before signing, have a territory map, a list of channel exceptions and an agreed set of remedies for breach. If the franchisor will not offer exclusivity, reassess the investment on the basis that another outlet of the same brand could open nearby, rather than paying on the strength of a verbal promise.