Franchise territories: how to secure exclusivity

It is easy to promise “you will be our only partner in the city” during negotiations, but difficult to honour that promise without precise rules. Before selling their first franchise, the owner of an established business should decide what territorial protection they are genuinely prepared to offer. For the franchise community, this is a matter of trust: partners need to understand which forms of competition within the network the agreement protects them against, and which remain a normal business risk.

1. Define exactly what the partner receives

An operating territory and exclusivity are separate terms. Naming a city or district does not, in itself, explain whether the franchisor may open a company-owned outlet there or enter into an agreement with another operator.

Before drafting the agreement, choose a model:

• No exclusivity: the partner operates at an agreed location, but the network may expand nearby.
• Protection against other franchisees: the rights holder undertakes not to grant an equivalent package of rights to other franchisees within the designated territory.
• Protection against company-owned outlets as well: the rights holder also undertakes not to carry on equivalent activities within that territory.

Each option needs a clear description. If protection applies only to a particular format, specify its defining features: for example, a full-service café rather than any location selling the brand’s products. Otherwise, the partner may regard a small kiosk as a breach of the promised exclusivity.

Check the business’s existing commitments: company-owned shops, rights already granted and arrangements with sales platforms. You cannot market a territory as available if rights that conflict with your promise already exist there. All exceptions should be disclosed to the prospective franchisee before the agreement is signed.

2. Check the legal limits of exclusivity

In Russia, commercial concession arrangements — the legal framework used for franchising — are specifically governed by Chapter 54 of the Russian Civil Code. Under Article 1027, an agreement may provide for the use of a package of exclusive rights with or without a specified territory. A territory is therefore not a mandatory term of every such agreement.

Article 1033 of the Russian Civil Code permits the rights holder to undertake not to grant equivalent packages of exclusive rights to others for use within the allocated territory, or to refrain from carrying on equivalent activities there itself. These obligations, rather than the marketing label “exclusive”, determine the scope of the partner’s protection.

However, territorial protection does not give the parties the right to divide customers by place of residence. Article 1033 expressly renders void any terms allowing the franchisee to sell goods, perform work or provide services exclusively to customers located or resident within a particular territory. Do not turn rules on outlet locations into a ban on serving customers from a neighbouring district.

Restrictive terms may also be declared invalid at the request of the competition authority or another interested party if they breach competition law, taking account of market conditions and the parties’ positions. Territorial restrictions must be checked not only against the Russian Civil Code, but also against Federal Law No. 135-FZ “On Protection of Competition”.

A commercial concession agreement must be made 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 effect.

3. Make the boundaries verifiable

Phrases such as “the city centre”, “the surrounding blocks” and “the area around the shopping centre” leave room for disputes. Describe the boundary so that two independent people would reach the same conclusion about whether a particular address falls within it.

Prepare a schedule to the agreement containing:

• a written description of the boundaries using streets, addresses or coordinates;
• a map showing the protected area;
• a rule for premises located directly on the boundary;
• a list of existing outlets and agreed exceptions;
• a procedure to follow if administrative boundaries or the outlet’s address change.

State which document takes precedence if the map and written description differ. If you use a radius, define the starting point and the measurement method: straight-line distance and distance by road produce different results.

Do not automatically grant an entire city simply to secure your first sale. First assess how many outlets local demand can support and whether one partner can develop the territory. Exclusivity should reflect the business’s actual capabilities, not compensate for a weak franchise sales pitch.

4. Address delivery and digital channels separately

Even a precise map does not establish who should receive an order placed through a shared website. Before signing the agreement, distinguish between the physical location of outlets, advertising and the allocation of enquiries.

Explain who handles website enquiries, how the fulfilment outlet is selected and what happens if that outlet is overloaded. Allow for customers to choose an outlet themselves. These rules should organise service delivery, not become an unlawful ban on selling to customers from another area.

Agree separately on marketplace sales, deliveries from company-owned premises and dealings with corporate customers. If the franchisor retains these channels, the exceptions must be specific. A clause stating that “all online sales are excluded” could effectively make territorial protection meaningless.

5. Set procedures for changing and protecting the territory

Specify how long exclusivity lasts, when it begins and the conditions for retaining it. If protection depends on opening several outlets, define the timetable, how compliance will be verified and the consequences of delay. Do not give the franchisor an open-ended right to withdraw exclusivity on grounds of “insufficient development”.

Provide for notice of a breach, a response deadline and a procedure for remedying it. Establish a written approval procedure for changes to the territory. Separately, check whether the corresponding change to the grant of rights requires state registration.

Practical takeaway: before selling your first franchise, prepare a territory map, a list of exceptions and a contractual description of the franchisor’s obligations. Test them against three scenarios: a new neighbouring outlet, an order placed through the website and a partner relocating. If the answers are ambiguous, the terms are not yet ready.