Franchise Territory: How to Define Boundaries and Exclusivity

When turning an existing business into a franchise, the question of territory is often left until the first negotiations. Yet a promise that “the city will be yours” can block the network’s expansion or lead to disputes. A sustainable franchise network needs clear boundaries: where each franchisee operates, what protection they have against competition within the network, and which rights the business owner retains.

1. Distinguish between operating territory and exclusivity

The territory in which rights may be exercised and territorial exclusivity are separate contractual terms. The first defines the geographical scope of operations under the agreement. The second sets out the franchisor’s obligations: for example, not to grant a similar package of rights to other franchisees in that territory, or not to carry on similar activities there itself. Simply naming a city does not give a franchisee exclusive status.

In Russia, these relationships are specifically governed by Chapter 54 of the Civil Code of the Russian Federation, entitled “Commercial Concession”. Article 1027 allows an agreement to be concluded with or without a defined territory for the use of the package of exclusive rights. Article 1033 permits certain restrictions on the parties’ rights, including territorial obligations on the franchisor. The scope of exclusivity must therefore be expressly agreed, rather than inferred from marketing promises.

Before drafting the agreement, answer four questions:

• Where may the franchisee open the agreed outlet?
• May they open additional outlets without separate approval?
• May rights be granted to other franchisees nearby?
• May the franchisor open company-owned outlets in the territory?

Check existing commitments too. If you have already promised territorial protection to one franchisee, an offer to a neighbouring franchisee must not conflict with it. Keep a central register of allocated territories, accessible to staff who discuss terms with prospective franchisees.

2. Set boundaries using evidence from your existing business

Do not allocate territory solely by administrative boundaries. A district may be too large for a single coffee shop and too small for a mobile service business. Start with the actual catchment area of your existing business: where customers come from, how long journeys take, and where delivery ceases to be commercially viable.

Use anonymised sales and order data. Assess residential neighbourhoods, office districts, transport barriers and seasonal changes in demand separately. The aim is not to promise a particular level of revenue, but to check whether there is enough potential demand for the chosen format and whether the catchment areas of different outlets overlap excessively.

Boundaries can be defined using:

• a list of towns, villages or municipalities;
• a closed boundary drawn on a map, with coordinates;
• a list of streets and specific addresses;
• a radius from a precisely defined point, with an agreed method of measurement.

The phrase “five kilometres from the premises” leaves questions unanswered: as the crow flies or by road, and from the entrance or the centre of the building? A map attached to the agreement must make the boundary unambiguous. Specify whether coordinates or the written description take precedence if they differ, and what happens if streets are renamed or administrative boundaries change.

It is useful to create an internal territory profile recording its boundaries, existing outlets, permitted formats, the rationale for its size and any commitments already made. This is a management document, not a substitute for the agreement.

3. Agree separate rules for delivery and digital channels

Even a precise map does not tell you who receives an order placed through a shared website. A customer may live in one territory, work in another and receive goods in a third. Territorial terms must therefore distinguish between outlet locations, advertising activity and order handling.

Explain how enquiries and orders coming through a shared telephone number, website or app are allocated. Criteria might include the fulfilment address, stock availability, outlet capacity or the customer’s choice. State who pays for delivery, handles complaints and records the sale in their reporting. If third-party platforms are used, take account of the limits of their settings: the franchisor may not always be able to control visibility or order allocation.

Importantly, Article 1033 of the Russian Civil Code renders void any terms under which the franchisee may sell goods, perform work or provide services only to customers located or resident in a particular territory. Rules on outlet locations must not become a ban on serving residents of “someone else’s” territory. A lawyer should review delivery and enquiry-allocation arrangements in light of this provision.

List any exceptions to territorial protection in advance, such as an existing online shop, a company-owned outlet or service provision to specified corporate clients. Avoid vague wording such as “and other channels at the franchisor’s discretion”: it makes the promised protection unpredictable.

4. Set conditions for retaining and changing protection

If exclusivity is granted in return for developing a territory, the franchisee’s obligations must be measurable. Rather than requiring them to “actively develop the region”, specify agreed milestones: securing premises, opening an outlet or launching a particular format. Deadlines should allow for approval procedures, fit-out work and deliveries, rather than simply reflecting the franchisor’s commercial expectations.

Set out how a breach will be notified, the period allowed to remedy it and the consequences. Do not conflate the loss of exclusivity with termination of the entire agreement: these are different decisions. The mechanism for changing the terms needs legal review, especially if unilateral action is envisaged. Territorial restrictions also need to be assessed under competition law: Article 1033 expressly allows the relevant restrictive terms to be challenged.

The territorial schedule must be consistent with the main agreement. Under Article 1028 of the Russian Civil Code, a commercial concession agreement must be in writing, and the grant of the right to use the package of exclusive rights must be registered with Rospatent, Russia’s intellectual property authority. When a territory changes, a lawyer should determine which amendments must be formally documented and registered; simply exchanging a new map by email may not be enough.

Practical takeaway: before offering a franchise, prepare a territory map, a list of exclusivity commitments and rules for allocating orders. Test them against three scenarios: a new neighbouring outlet, a delivery across a territorial boundary and a franchisee’s delayed opening. If the answers are ambiguous, the terms are not yet ready to sign.