Franchise territory protection: what does exclusivity mean?

A franchise offer may come with an attractive promise: you will be the only franchisee allowed to operate an outlet in a particular town or district. But that alone does not tell you who can serve customers living there, or whether the franchisor can open its own outlet nearby. The value of territory protection within a franchise network lies not in its name, but in the precise terms of the agreement. Before investing, examine exactly what protection you are getting and which exceptions apply.

1. Distinguish your operating territory from exclusivity

The geographical scope of an agreement and territorial exclusivity are not the same thing. The former may define where you can use the franchise system, while the latter also includes the franchisor’s commitment not to allow certain other operations within that area.

An agreement that names your town does not necessarily give you exclusivity. Look for a clause that expressly restricts the franchisor from opening its own outlet or appointing another franchisee. Check whether this applies to all outlet formats, or whether shopping centre locations, for example, are excluded.

Ask for clear answers to these questions:

• Can the franchisor open its own outlet in the territory?
• Can it authorise another franchisee to open an outlet or a temporary sales point?
• Does the protection cover home delivery and services provided at customers’ premises?
• Are any customers, sites or sales channels reserved to the franchisor?

Territory protection does not eliminate competition from other businesses. It determines the extent of any overlap you may face within your own franchise network.

2. Record the boundaries in a schedule to the agreement

Phrases such as ‘the town and its catchment area’ or ‘the exclusive partner for the local area’ can easily lead to disputes. Use identifiable administrative boundaries, postcodes, a street list or a map attached to the agreement. If there is more than one description, the agreement should state which takes precedence if they differ.

For a territory defined by a radius, clarify the centre point and how distances are measured. Measuring as the crow flies is not the same as measuring by road. Nor should relocating the outlet later inadvertently change the protected territory: there should be a separate procedure for approving the new site and boundaries.

Request a dated overview of nearby outlets that are already operating or have already been approved by the franchisor. Ask about planned openings too, but distinguish binding commitments from business plans that may still change.

The schedule should also record existing exceptions. For example, if a national corporate customer will continue to be served centrally, you can factor the impact into your business plan from the outset.

3. Make separate arrangements for online orders

A restriction on opening outlets does not necessarily address orders placed through the central online shop. The same customer might visit your outlet, order directly from the franchisor or use another franchisee’s services. These situations may require separate operational and financial arrangements.

Set out in writing how the central system allocates enquiries: by the customer’s home address, the place of fulfilment, the distance from an outlet or another criterion. There should also be rules for correcting misdirected enquiries and declining fulfilment.

Any obligation to fulfil orders should come with clear arrangements for allocating revenue and costs. If you have to hand over a product ordered centrally, establish what payment you receive and who bears the associated local labour costs.

It is worth testing the agreement against a specific scenario: a customer living in your territory orders online but wants to collect the product from another outlet. Who receives the order, who fulfils it and how are payments settled? If there is no clear answer, the practical operation of territory protection has not yet been fully worked out.

4. Understand the Hungarian legal framework

Hungary has no standalone, comprehensive franchise act, but Act V of 2013, the Hungarian Civil Code, specifically regulates franchise agreements. General contract provisions also apply. However, signing a franchise agreement does not automatically give you territorial exclusivity.

Territorial and customer restrictions also need to be reviewed under competition law. Relevant provisions may include the rules on anti-competitive agreements in Act LVII of 1996, as well as applicable EU competition law, including Commission Regulation (EU) 2022/720.

For example, actively targeting customers in another territory and fulfilling unsolicited orders from that territory are treated differently. The restrictions permitted also depend on the details of the agreement, so do not seek a blanket ban on all sales outside a territory without legal review.

Hungary has no generally mandatory franchise pre-contractual disclosure document or statutory, franchise-specific fourteen-day waiting period. The Hungarian Franchise Association’s recommendation to allow at least fourteen days to review an agreement is professional guidance, not a generally applicable statutory deadline.

5. Protect the commitment against later changes

Check how long exclusivity lasts, what conditions it depends on and how it can be amended. If the franchisor reserves the right to redraw territories, ask for objective criteria, advance notice and an opportunity for consultation. A reduction in your territory could also affect the value of your investment.

The agreement should set out what happens if the territorial commitment is breached, including how to raise a complaint, how it will be investigated and the deadline for resolving it. Discuss with a lawyer which contractual remedies would be appropriate if the franchisor authorises a new outlet despite its commitment not to do so.

Practical takeaway: before signing, make sure you have a map, a list of exceptions and rules governing online orders. Build your business plan around only the territory protection the agreement actually provides.