Franchise territory: how to protect your outlet before you buy

A promise that “you will be our only partner in the area” does not guarantee protection against another outlet under the same brand opening nearby. As a prospective franchisee, you need not only to choose a location, but also to understand who else can operate nearby and accept online orders. Clear territorial rules help align interests across a franchise network. Check them before paying, while there is still scope to negotiate the terms.

1. Distinguish between your operating territory and territorial protection

The agreement may specify a city, district or premises address. However, simply naming a territory does not mean the franchisor has undertaken not to open its own outlets there or grant rights to other franchisees. These are separate provisions: one defines where the rights may be exercised; the other restricts the rights holder’s activities.

In Russia, commercial concession agreements — the legal framework used for franchising — are governed by Chapter 54 of the Russian Civil Code. Article 1027 allows an agreement to be concluded with or without a specified territory for the use of the package of exclusive rights. Article 1033 allows the agreement to include an undertaking by the rights holder not to grant equivalent packages of rights to others for use within the allocated territory, or to refrain from carrying out similar activities there itself.

So, rather than relying on the word “exclusive”, establish:

• whether the franchisor is prohibited from opening its own outlets;
• whether it is prohibited from granting equivalent rights to new franchisees;
• which formats the protection covers: full-sized shops, kiosks, collection points or mobile outlets;
• whether there are exceptions for existing franchisees or particular sales channels;
• when the undertaking takes effect and how long it lasts.

A commercial concession agreement must be in writing. Under Article 1028 of the Russian Civil Code, the grant of the right to use the package of exclusive rights must be registered with Rospatent, Russia’s intellectual property office. Without registration, that grant is deemed not to have taken place. Registration does not, however, create territorial protection in itself: the scope of that protection is determined by the agreement.

2. Record the boundaries and check rights already granted

Phrases such as “the city centre”, “the surrounding district” or “the area around the shop” leave too much room for dispute. It is better to attach a map with unambiguous boundaries and a written description to the agreement. If a radius is used, specify the point from which it is measured and the measurement method: straight-line distance and distance by road produce different results.

Check whether shopping centres, railway stations, business parks and new residential developments fall within the protected area. Separately agree what happens if streets are renamed or administrative boundaries change. Ideally, such changes should not automatically alter the agreed territory.

Ask the franchisor for a list of the brand’s existing and planned outlets within this area. Enquire not only about the addresses of outlets already trading, but also about agreements already signed, reserved territories and commitments to other franchisees. An empty map today does not mean nobody has the right to open there tomorrow.

Details of rights already granted should be recorded in an appendix or in written assurances from the franchisor. If there are exceptions, identify each one precisely: the specific outlet, its format and its permitted activities. Wording such as “except for existing arrangements” does not allow you to assess the true extent of your protection.

3. Agree delivery and online order arrangements separately

Even if nearby shops are prohibited, some orders may go through the brand’s central website or app, or be routed to another outlet via a delivery service. You therefore need to discuss outlet locations and the rules for handling remote orders separately.

Ask for examples showing how an order from a customer in your territory is allocated. Who takes payment, selects the outlet that fulfils the order and receives the revenue? Can head office transfer an order to another outlet because of capacity constraints? Who pays for delivery and returns? The answers should be reflected in the agreement, not merely in the software settings used during the sales presentation.

Territorial protection does not, however, give you the right to restrict your customer base arbitrarily. Under Article 1033(2) of the Russian Civil Code, provisions requiring a franchisee to sell goods, carry out work or provide services exclusively to customers located or resident within a particular territory are void. Restrictive provisions may also be assessed under competition law.

In practice, this means that a prohibition on the franchisor opening a competing outlet must not be replaced with a prohibition on the franchisee serving a customer from “someone else’s” territory. Have a lawyer review the rules for allocating enquiries through shared channels and arranging deliveries, particularly if they effectively prevent sales outside the district.

4. Check the conditions for retaining protection and the consequences of a breach

Sometimes territorial protection depends on achieving revenue targets, opening by a deadline or launching additional outlets. Assess these conditions before buying: a seemingly extensive protected territory may turn out to be a temporary privilege that is easy to lose.

For each ground on which protection can be lost, agree a measurable criterion, a data source, an assessment period and a notification procedure. Include a period in which to remedy any breach. Check whether the franchisor can unilaterally increase sales targets or change the boundaries by updating its internal standards.

Discuss in advance what happens if the franchisor breaches its own obligations. Possible remedies include a contractual penalty, an agreed reduction in fees, an obligation to stop the breach or a right for the franchisee to terminate the agreement in specified circumstances. These remedies do not arise automatically: the grounds and procedures for applying them must be written into the agreement. Simply stopping royalty payments because another outlet has opened nearby is risky.

Practical takeaway: before paying, obtain a territory map, a list of exceptions and written undertakings from the franchisor. Then test three scenarios: a neighbouring outlet opens, an online order comes in, and you miss a sales target. If the agreement does not provide a clear answer to even one of these, the territorial protection provisions need further work.