Territorial Exclusivity in Franchise Agreements

When you build a franchise network from a successful business of your own, one question soon arises: how much territory should the first franchisee receive? An exclusive territory that is too large can hamper future expansion, while a vague promise can lead to disputes over new outlets and online orders. It is therefore worth planning your territorial rules before making an offer to your first franchisee, using business data and commitments that have been legally reviewed.

1. Start with your own outlet’s catchment area

Administrative boundaries are a convenient starting point, but they do not necessarily reflect buying habits. Accessibility can vary even within a single Budapest district, while outside the capital several towns or villages may form one natural catchment area. Do not grant an entire Hungarian county simply because an applicant asks for it.

First, examine where your existing customers come from, how far away they place orders from, and how far they are willing to travel for your service. Wherever possible, use aggregated geographical reports rather than personal data. Look separately at the customer journeys of walk-in customers, delivery customers and online shoppers: they may not define the same territory.

For your territorial plan, record:

• your existing outlet’s actual catchment area and spare capacity;
• potential new locations and their accessibility;
• the locations of competitors, shopping destinations and transport barriers;
• whether a new outlet is likely to serve additional demand or take sales from an existing outlet.

Prepare several territorial options, each with its own business assumptions. The performance of your own outlet does not automatically demonstrate that another territory will be viable. In any calculations you share, clearly distinguish measured data from estimates.

2. Define exactly what the protection means

The phrase ‘exclusive territory’ is not enough on its own. It might mean that the franchisor will not open a company-owned outlet in that area, will not appoint another franchisee there, or will restrict other franchisees’ targeted sales under certain conditions. These are different commitments, with different implications under competition law.

Include a clear map and a verifiable description of the territory in a schedule to the agreement. If you use a list of towns and villages or postcodes, address any overlaps and subsequent boundary changes. The document should specify which description takes precedence if there is a discrepancy.

Distinguish between the business location, the service area and exclusivity. Permission to operate at a specified address does not mean that a franchisee is entitled to the revenue from every purchase made nearby. Similarly, a delivery area is not necessarily a protected territory.

Take account of existing company-owned outlets, central sales channels and national customer contracts at the planning stage. If these are exceptions, list them individually. A broad exception for ‘central accounts’ introduced later can easily undermine the protection promised to the franchisee.

Also make clear to the franchisee that territorial protection is not a revenue guarantee. Restricting the franchisor’s own expansion does not remove external competition or, by itself, ensure enough customers.

3. Align your commitments with Hungarian and EU law

Hungary has no standalone, comprehensive franchise act, but it would be incorrect to say that franchise agreements have no specifically named legal provisions. Sections 6:376–6:381 of Act V of 2013 on the Civil Code regulate franchise agreements, known in Hungarian as jogbérleti szerződés. General contract rules also apply, including duties to cooperate and provide information.

There is no general requirement specifically for franchise systems to register with a public authority or issue a mandatory, standardised pre-contractual disclosure document. This does not, however, permit misleading promises about a territory’s prospects. Nor is a code of ethics legislation; its relevance may arise, among other things, from membership obligations and contractual commitments.

Act LVII of 1996 on the Prohibition of Unfair Market Practices and Restriction of Competition is particularly important when considering territorial restrictions. Where the conditions for applying EU competition law are met, Article 101 of the Treaty on the Functioning of the European Union also applies. European Commission Regulation (EU) 2022/720 provides an important framework for assessing vertical agreements.

Active and passive sales are not the same. A campaign targeting customers in another territory will typically constitute active selling; fulfilling an unsolicited customer enquiry will generally constitute passive selling. Exclusivity does not entitle you to prohibit all sales outside a territory. Preventing the effective use of the internet for sales also carries significant competition law risks. Have the specific clauses checked by a lawyer experienced in franchise and competition law.

4. Set rules for online orders and territorial reviews

Alongside the map schedule, draw up an order-handling policy. Who fulfils orders placed on the central website? Who issues the invoice, bears the delivery cost and handles complaints? If the nearest franchisee cannot fulfil an order, there should be a predefined procedure for assigning it to someone else.

The allocation of enquiries received centrally should be traceable. Capacity and agreed service deadlines may be considered alongside territorial responsibility, but allocation should not become an opaque series of ad hoc decisions. Do not confuse rules for routing central orders with restrictions on enquiries received directly by franchisees.

If territorial protection is conditional on performance, specify the metrics, data sources, review dates and opportunities to remedy shortcomings in advance. Do not reserve an unlimited right to reduce a territory unilaterally. Approval of a new outlet should involve a documented impact assessment and consultation with the affected franchisee.

Practical takeaway: before making your first territorial promise, prepare a map, a list of exceptions and an order-handling policy. Together, these show what you guarantee to each member of the franchise network and where scope remains for future expansion.