Franchise agreements: How to navigate territory rights

Discover key insights every franchisee needs to navigate territory rights, with guidance from two of the UK’s leading experts

Franchising in the UK isn’t governed by a single, overarching law, meaning the structure of the relationship between franchisors and franchisees relies on one key document: the franchise agreement. This agreement should clearly outline the rights, responsibilities, and expectations of both parties. Without that clarity, things can quickly become complicated.

The key to protecting your investment often lies in the territorial rights granted within that agreement. These rights can define everything from the market you can target to how you’re shielded from competition. Enter our experts: lawyer Emily Sadler, Senior Commercial Solicitor at Harper James, and franchise consultant Maria Misyurina, co-founder of Franchising Guru with 15 years of experience in franchising and law. Both highlight the importance of legal due diligence in ensuring that the territorial terms align with your business goals and provide the protection you need.

As Maria points out, in the UK, franchising is largely based on contract law with guidance from the British Franchise Association’s Code of Ethics, so it’s crucial to pay close attention to the details. “The relationship between the parties depends primarily on the terms set out in their franchise agreement, which should clearly define the rights and responsibilities of both parties,” she points out. “Remember, any discussions or changes about territory must be documented in writing to be legally binding – without that, there’s no guarantee of protection. It’s highly advisable to engage an experienced lawyer to review these agreements, as some may include very specific territorial nuances.”

So, whether you’re signing up for a traditional franchise, or considering a more flexible remote digital model, understanding the ins and outs of territorial rights is essential for long-term success. With insights from Maria and Emily, this article will help you navigate the complexities of franchise agreements with confidence.

What’s the difference between unit, area development, and area representative franchise agreements?

Choosing the right franchise agreement is crucial, as each model impacts liability, compliance obligations, and profit sharing. “Legal due diligence is essential when determining which structure best suits your ambitions and capabilities,” says Emily.

“A unit franchise agreement grants a franchisee the right to operate a single unit in a specific location,” she explains. “The franchisor retains significant control, and any further expansion requires separate agreements.”

By contrast, an area development agreement allows a franchisee to open multiple units within a defined territory over a set period. “While the franchisor still maintains oversight, the focus is on meeting development milestones rather than managing daily operations, with clear performance targets set in the agreement,” she adds.

Failing to meet these deadlines can have serious consequences. “If a franchisee falls behind on their development commitments, the agreement may be terminated, and any undeveloped territories annulled,” warns Maria. “That said, this structure can be highly attractive, as it often comes with incentives such as reduced fees or extended development periods, benefiting both the franchisee and the franchisor by accelerating market expansion.”

An area representative agreement, also known as a master franchise, operates on a much larger scale – covering a region (such as the North of England) or an entire country (such as France). “The area representative, or master franchisee, is responsible for recruiting sub-franchisees, assigning territories, providing training, and ensuring marketing and operational standards are upheld,” continues Emily. “They may also run their own units. In return, they receive a larger share of franchise fees and royalties, passing the remainder to the franchisor.”

This model enables rapid growth but comes with significant responsibilities. “An area representative must handle recruitment, training, and ongoing support, which often requires additional legal and financial structures to manage sub-franchisees effectively,” says Maria.

“Master franchisees operate under a master franchise agreement, which grants them the rights to develop and sub-franchise within a defined territory,” adds Emily. “They must also have a robust sub-franchise agreement that aligns with the original franchisor’s terms while ensuring compliance with UK regulations. Although franchise law in the UK falls primarily under contract law, master franchisees must also navigate competition law, intellectual property protections, data protection regulations, and consumer rights laws. Acting as intermediaries between the franchisor and sub-franchisees, they need clear contractual obligations to manage their legal and operational responsibilities effectively.”

How do joint ventures or partnership-based franchise agreements work in practice?

“In a joint venture franchise, the franchisor and franchisee create a new legal entity, often a limited company, where both hold equity and share in the profits and responsibilities. This entity operates the franchised business,” explains Emily. “A partnership-based model, on the other hand, involves the parties entering into a legal partnership, governed by a formal agreement, to run the business together.”

“A detailed partnership agreement is essential,” advises Maria. “It should clearly define ownership percentages, management responsibilities, decision-making authority, and operational roles. Profits, losses, and risks must also be distributed according to pre-agreed terms to protect all parties involved.”

“These structures also give franchisees greater influence over business operations and decision-making compared to a traditional franchise model,” Emily notes. “However, they come with risks, such as disputes over control, profit-sharing, and long-term strategy. When structured well, they can lead to significant financial rewards and a closer working relationship with the franchisor.”

For franchisors, this model can be particularly beneficial when expanding into new regional or international markets. “Partnering with individuals who have local market expertise – such as knowledge of consumer behaviour, regulatory environments, and cultural nuances – allows the franchisor to maintain control while leveraging local insights. Some brands, like Velvet Taco, have successfully used this approach to accelerate expansion,” points out Maria.

How do you define a territory?

“In the UK, the franchise territory must be defined in clear, unambiguous terms – typically using maps, postal codes, or detailed descriptions,” explains Maria. “This ensures both franchisor and franchisee understand operational boundaries.” Poorly defined territories can lead to disputes. “Although equal-sized territories may seem fair, factors like demographics and geography determine sales potential,” she adds. Many franchisors use mapping software, and franchisees have the right to request these maps to assess market potential. Performance targets should be reasonable and achievable within the defined area.

Exclusive territory clauses protect a franchisee’s market share by preventing the franchisor from opening additional outlets or granting overlapping rights,” continues Maria. “If exclusivity is not granted, the franchise agreement must clearly outline risk management measures – such as notice periods and operational safeguards – to prevent unfair competition. Franchisees may well be allowed to market or deliver outside their territory, but clear communication is essential to avoid market overlap.”

“In the UK, the franchise territory must be defined in clear, unambiguous terms – typically using maps, postal codes, or detailed descriptions – to ensure that both franchisor and franchisee understand operational boundaries”

How do territorial rights typically work in non-compete terms?

The ability for franchisors to open competing units depends on the franchise agreement. “If the agreement grants exclusive territorial rights, the franchisor cannot open another unit – whether franchised or corporate-owned – within that territory without breaching the contract,” highlights Emily. However, if the agreement provides only ‘sole’ rights, the franchisor can operate its own outlet in the area but cannot appoint another franchisee. Clarity in the agreement’s wording is crucial to ensure franchisees are properly protected.

“Territorial rights in franchise agreements often come with non-compete provisions, which limit internal competition,” Maria points out. “These rights typically provide franchisees with market protection, ensuring no competing franchise units or head-office-owned outlets can operate within their designated area. This protection supports franchisees in building their business and brand without undermining their efforts through internal competition. Some agreements even extend these protections to online sales or delivery services marketed under the franchisee’s local operation.”

Non-compete clauses must comply with statutory requirements, like the Unfair Contract Terms Act 1977 and competition laws, ensuring they are not unfairly restrictive. If the territorial clause is too broad, it could be challenged in court, weakening the franchisee’s protection. “For these clauses to be effective, they must be precisely drafted to avoid ambiguity,” Maria continues. “If an exclusivity clause is ambiguous or overly broad, the franchisee’s protection may be weakened.”

Encroachment disputes arise when a franchisor or another franchisee operates in or near a protected territory, drawing customers away. This can be through new physical locations, online sales, or indirect competition. “If the agreement guarantees exclusivity, the franchisee can seek legal remedies such as damages or an injunction to stop the encroachment. However, if the agreement is vague, legal options may be limited. Strong, clear contracts are the best protection against such disputes,” advises Emily.

How do territorial rights work with remote franchise models?

In remote franchise models, such as those involving virtual assistants or digital marketing, territorial rights are defined by market segments or customer bases rather than geographic areas. Some franchisors manage this centrally, while others allow franchisees to freely compete for digital customers. “Franchise agreements should clearly outline how leads and online sales are allocated to avoid disputes,” Emily recommends.

“Franchise agreements often include provisions for assigning customers in an online environment,” explains Maria, adding that if services or products are purchased directly from the franchisor’s website, the franchisor may designate customers to specific franchisees based on criteria like location, service type, or demographics. “This approach balances flexibility with franchisee protection, ensuring fair distribution of business even when territorial exclusivity isn’t granted.”

Alternatively, franchisors may adopt an open territory model, where franchisees aren’t assigned specific geographic areas. “In this approach, franchisees can solicit customers from anywhere within the franchisor’s market reach, competing for digital customers with other franchisees,” Maria concludes. “This model removes traditional territorial boundaries, offering less protection but more freedom.”

Territory traps: what to watch out for

Maria Misyurina warns that unclear territorial terms can leave franchisees vulnerable to competition, market dilution, and lost revenue. Watch out for these pitfalls.

Overly broad

Franchisors risk granting large exclusive territories to franchisees who fail to develop them. Many agreements allow franchisors to withdraw exclusivity if performance targets aren’t met. Franchisees should ensure territorial changes are a last resort after all other options have been exhausted.

Inadequate restrictions

If the agreement doesn’t clearly restrict the franchisor from opening additional outlets, franchisees may face internal competition. Risk management should be in place before expansion is permitted.

Unrestricted selling or delivery

Such clauses allow franchisors to sell or deliver products anywhere, eroding a franchisee’s exclusive rights. This can lead to market cannibalisation, where franchisees lose sales to the franchisor’s own outlets or delivery services.

Competing brand acquisition

If a franchisor can acquire a competing brand within or near a franchisee’s territory, it can create direct competition and dilute the franchisee’s market. Beyond competition, it may even allow re-branding of the acquired business, confusing customers and undermining local brand presence.