A: In the vast majority of franchise relationships, the franchisor will grant some type of territory rights to the franchisee. These territory rights may be limited so the franchisee only obtains the right to operate their business from a specific location. In other circumstances, a franchisor may grant broad territory rights to a franchisee, including the exclusive right to operate the franchised business in a specific geographic territory. No matter what type of franchised business a franchisee is considering, close consideration of the territory rights being granted is a must.
The first question that should be considered by a franchisee is whether the territory rights are sufficient for the type of franchised business they are acquiring. The scope of territory rights that a franchisor will offer to a franchisee will vary depending on a number of factors. Let’s use food service franchises as an example.
A franchisee of a full-service dining restaurant will often be granted some form of protected radius, which is a geographical area around the franchise where the franchisor will not open a restaurant that operates under the same name and system. The size of this protected radius depends on many factors, including whether the franchised restaurant is located in a large metropolitan area or a smaller town or suburb.
On the other hand, a fast food franchise that operates from a brick-and-mortar location will typically involve very limited territory rights, if any at all. Often a fast food franchisee will simply operate the franchised business only from the location identified in the franchise agreement and there will be no territory or protected radius rights granted by the franchisor.
From a franchisee’s perspective, the major question in deciding whether a protected radius is needed, and its size, is if they believe that having another franchise of the same type operating in close proximity to their franchise would have any significant negative impact on their business.
Franchised businesses that have no physical location, such as home-based or mobile businesses, most typically involve the granting of some form of trading territory to the franchisee. These types of service-based franchisees are typically granted the right to operate the franchised business within a specific geographic territory identified in the franchise agreement. Often, these are fairly large areas identified in the franchise agreement by a map or a reference to postal codes.
In these circumstances, there are a number of issues that a franchisee needs to consider, including whether the territory rights are exclusive, meaning they are the only franchisee of the system who can operate a franchised business in the territory, or non-exclusive, meaning that other franchisees of the system can also provide services in the territory. In addition, a franchisee must consider whether the territory is large enough and contains enough potential customers of the system in order to be successful.
The second question that franchisees should consider is what exceptions there are to any territory rights that have been granted. Most franchise agreements that contain any sort of territory protection rights also contain a list of exceptions that often give the franchisor the right to:
- sell the same or similar products or services on the internet, or through other channels of distribution such as catalogues, vending machines, or supermarkets;
- establish franchised or corporately-owned units from non-traditional venues such as sports and entertainment facilities, airports, transit stations, and government buildings like hospitals and universities;
- offer the same or similar products or services to national account customers, typically customers who have locations both inside and outside of the territory being granted to the franchisee.
No matter the type of franchise one is considering, the nature of the territory rights being granted is always a significant issue. Franchisees need to carefully review the franchise documents, with the assistance of legal advice, to determine if the scope of the territory rights being granted makes sense for their business, and decide if they are able to accept any exceptions to those rights.
Blair A. Rebane
Partner and National Leader, Borden Ladner Gervais LLP
www.blg.com