Franchise territory exclusivity: what should you promise a franchisee?

When you turn an existing business into a franchise network, early applicants often ask for exclusivity across an entire city. Yet a hasty promise can later prevent you from opening new outlets, selling online or serving existing customers. A good territorial agreement does more than draw a boundary: it defines precisely what protection the franchisee receives, what falls outside that protection and how you will handle changes.

1. Separate the premises, the territory and the customer

Approving a business location does not, in itself, grant territorial exclusivity. Permission to open an outlet is one right; a commitment that neither you nor another franchisee will open an outlet under the same brand nearby is another.

When preparing the agreement, answer three questions separately:

• Where may the franchisee operate? At a specified address, across several approved locations or by providing services at customers’ premises?
• What forms of expansion will the franchisor refrain from pursuing? Does the commitment cover only new franchised outlets, or also company-owned outlets, temporary sales points and other outlet formats?
• Which customers or channels does the agreement cover? What happens to online orders, national corporate accounts and customers coming from other towns or cities?

The phrase “exclusive franchisee in Budapest” does not adequately address any of these points. Instead, specify the right being granted and the franchisor’s precise commitment. The franchisee must also understand what they are not receiving: territorial protection alone does not guarantee turnover, profit or exclusive access to every local customer.

2. Define the territory using data, not at the end of negotiations

Start by examining the actual catchment area of your existing outlet. Where do customers come from, how far do they travel, how far can you deliver economically, and where do purchasing habits differ? Use aggregated data; planning generally does not require you to share customers’ personal data.

Administrative boundaries are easy to describe, but they do not necessarily reflect demand. A river, railway line or difficult road junction may separate two neighbourhoods more effectively than a district boundary. For services, travel time may matter; for physical outlets, accessibility on foot and by car can also be important.

Prepare a map as an annex, alongside a written description of the boundaries that will remain clear over time. Agree which takes precedence if they differ. Expressions such as “the city centre” or “the immediate vicinity of the outlet” can easily lead to disputes if left undefined.

Before making an offer, mark existing company-owned outlets, franchise locations already committed to and planned sales channels. If you want to retain a separate outlet in a shopping centre, do not announce this later as an exception. Knowing the exceptions helps applicants plan their investment more realistically.

3. Have the exclusivity arrangements reviewed for competition law compliance

Hungary has no single, comprehensive franchise act, but it would be wrong to say that franchise agreements are unregulated. Act V of 2013, the Hungarian Civil Code, contains specific provisions on franchise agreements, alongside the general rules governing contracts. There is no general franchise-specific requirement for registration with a public authority or for a pre-contractual disclosure document in a prescribed format. Nevertheless, the parties remain subject to duties to cooperate and provide information.

Territorial restrictions require particular attention to Act LVII of 1996, Hungary’s Competition Act. Where the conditions for applying EU competition law are met, Article 101 of the Treaty on the Functioning of the European Union and Commission Regulation (EU) 2022/720 on vertical agreements are also relevant. The former Government Decree 246/1997 on franchise agreements cannot be relied on as a current basis for compliance.

In practice, there is an important distinction between active sales — such as specifically targeting another franchisee’s protected territory — and passive sales, such as fulfilling an unsolicited customer enquiry. These restrictions are assessed differently; a blanket ban on passive sales is particularly risky. Nor can online sales simply be prohibited to all customers outside the territory.

Do not, therefore, copy a clause stating that “the franchisee may sell only within their own territory”. Ask a lawyer with competition law expertise to review the specific arrangement, market circumstances, exceptions and online operations. The franchise community’s code of ethics is an important benchmark for cooperation, but it is not legislation and cannot make a prohibited restriction lawful.

4. Set out how online orders and changes will be handled

A central website can easily generate enquiries from several franchisees’ territories. Decide in advance how these will be allocated: by the location where the order will be fulfilled, available capacity or the customer’s choice. Clarify separately who contracts with the customer, who fulfils the order and whether a fee is payable for passing on the lead. These should be rules for allocating centrally received enquiries, not unlawful restrictions on franchisees’ independent sales.

If continued exclusivity depends on performance, use conditions that are clear in advance and can be verified. It should not be possible to withdraw a territory on the basis of a vague reference to “inadequate performance”. Specify an assessment period, an opportunity for discussion and a reasonable period to put things right. Neither a failure by the franchisor nor a prolonged road closure should automatically be treated as the franchisee’s fault.

Also set out how a change to the territory can be proposed and how the resulting agreement takes effect. Regular reviews must not amount to an unrestricted right to redraw the map unilaterally.

Practical takeaway: before promising exclusivity, prepare a map, a precise list of rights and a list of exceptions. Have these legally reviewed alongside the rules for online operations, then make sure the offer and the agreement contain the same promise.