Franchisee territories: how to set the rules for exclusivity

Before welcoming your first partner into your franchise network, establish exactly what their ‘territory’ means. Are you promising not to allow another outlet under the same brand, giving them priority to open the next outlet, or simply agreeing on a specific location? Ambiguity can quickly lead to disputes over customers. Well-designed territorial rules protect your relationship with the franchisee without unnecessarily restricting the growth of the wider network.

1. Define the promise before drawing the boundaries

Territorial exclusivity should not be a vague selling point in a presentation to prospective franchisees. Start by setting out what your business is committing to. For example, you might promise that, within a defined area, you will neither open a company-owned outlet nor grant another franchisee the right to open an outlet of the same type. That is different from promising that all purchases made by residents of that area will go to one franchisee.

Distinguish between three arrangements:

• Location protection — applies to a specific outlet and a defined surrounding area.
• Territorial exclusivity — covers a specified area and precisely defined commitments by the franchisor.
• Development priority — gives the franchisee priority to apply for another outlet, but does not in itself confer exclusivity.

Also specify which formats the promise covers. A shop, seasonal stall, mobile outlet and online sales channel may compete with one another even though they operate differently. If you intend to make exceptions, explain them before the agreement is signed. Claiming later that a new format ‘is not really an outlet’ is unlikely to restore trust.

2. Define the territory using evidence from your existing business

Do not allocate an entire town or city simply because a candidate was the first to apply. Draw on the experience of your existing business: where customers come from, how far they travel, whether they buy on their way to work and how demand changes during the week. Analyse aggregated data without unnecessarily sharing customers’ personal data.

Administrative boundaries can be convenient, but they do not always reflect an outlet’s actual catchment area. A river, railway line, road layout or large shopping centre may influence customer behaviour more than a district boundary. If you use a radius around an address, specify whether distance is measured in a straight line or by road.

Prepare a map as an annex to the agreement, together with an unambiguous description of the area. State which document takes precedence if there is a discrepancy. Avoid phrases such as ‘around the town centre’ or ‘the natural catchment area’.

Then test two scenarios: no further outlet opens for an extended period, and a new outlet opens just outside the protected boundary. Assess the impact on your existing company-owned outlet, the franchisee and the scope for further growth. The aim is not to guarantee revenue, but to create clear terms for working together.

3. Distinguish franchisee protection from unlawful market sharing

Poland has no dedicated statute comprehensively regulating franchising. A franchise agreement is an ‘innominate contract’ — one not specifically defined in legislation — based on the principle of freedom of contract under the Polish Civil Code. That freedom nevertheless has limits. When defining territories, the Polish Act on Competition and Consumer Protection matters, as do EU competition rules where the conditions for their application are met.

Not all territorial protection is prohibited, but not every clause labelled ‘exclusivity’ is lawful. When assessing sales restrictions, one important distinction is between active and passive sales. Active sales involve deliberately targeting particular customers, for example through advertising aimed at a specific territory. Passive sales generally involve responding to unsolicited enquiries from individual customers.

Do not include a blanket ban on serving any customer from outside the allocated territory. Restrictions on passive sales are generally particularly problematic. Restrictions on active sales also require a legal assessment; agreement between the two parties is not enough.

Commission Regulation (EU) 2022/720 on block exemptions for vertical agreements may apply when assessing the arrangement. It is neither a franchising statute nor automatic approval of an agreement. Before the rules are introduced, a lawyer should assess the distribution model, the parties’ market positions and the specific restrictions. Customer allocation should not be agreed between franchisees themselves either.

4. Set rules for handling orders and making changes

Most disputes arise where the map meets day-to-day sales. Explain how enquiries from a shared website, online orders, in-person collections and customers with multiple branches will be handled. Establish who contracts with the customer, delivers the service and receives payment. Internal payment arrangements should not replace an assessment of whether sales restrictions are lawful.

Test the arrangement against specific situations: a customer orders online but collects in another town; a business commissions a service across several locations; a franchisee moves their outlet to a neighbouring street. Each case should have a clear decision-making process and a named person responsible for resolving uncertainty.

If continued exclusivity depends on meeting a development plan, define measurable requirements, an assessment period and a procedure for remedying shortcomings. Do not give head office an unrestricted right to reduce the territory unilaterally. Document boundary changes and exceptions in accordance with the agreement before making commitments to another franchisee.

Practical takeaway: before signing your first agreement, prepare a map, a precise definition of the protection offered and a set of sample order scenarios. Check that they are consistent with one another and comply with competition law. Only then should you present exclusivity as a tangible benefit for the franchisee.