Franchise Territory (Exclusive and Protected Territory)

A territory clause answers one question: where can the franchisor put the next outlet? Without one, a franchise agreement grants rights only for the premises, and the franchisor may open, or license someone else to open, a unit across the street. With one, the franchisor gives up some of that freedom inside a defined area.

Territories are drawn in several ways:

• a radius, such as 3 kilometres, from the franchised premises;
• a list of postal codes, often forward sortation areas (the first three characters of the code);
• municipal or ward boundaries, or a map attached as a schedule; or
• a population count, such as 50,000 residents.

The clause can also restrict the franchisee. Many agreements bar the franchisee from opening elsewhere, soliciting customers or delivering outside its territory. Rights to develop several future units across a larger area are usually granted through an area development agreement, which pairs the territory with an opening schedule.

The labels vary between systems, so the definitions in the agreement control.

Reserved rights are where value is won or lost. Franchisors commonly reserve airports, campuses, hospitals, stadiums, transit stations, travel plazas and outlets inside grocery or big-box stores; online and app sales; third-party delivery; branded packaged goods sold through retail; national or institutional accounts; and the right to acquire a competing chain and keep operating its units. Each reservation narrows what the franchisee is paying for.

Exclusivity is often conditional. A franchisor may make continued exclusivity depend on minimum sales or market penetration, and may shrink the territory or make it non-exclusive if the franchisee falls short.

Encroachment is the opening of a new outlet or sales channel close enough to divert an existing franchisee's customers. Inside an exclusive territory, it is usually a straightforward breach of contract. Outside the territory, or through a reserved channel, the agreement generally permits it, and the franchisee's position depends on statute and good faith.

Section 3 of the Arthur Wishart Act (Franchise Disclosure), 2000 imposes on each party a duty of fair dealing in the performance and enforcement of the franchise agreement, which includes acting in good faith and in accordance with reasonable commercial standards. Section 11 makes any franchisee waiver of rights under the Act void. At common law, the Supreme Court of Canada held in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, that contractual discretion must be exercised reasonably, meaning consistently with the purposes for which it was granted. A franchisor that uses a reserved right to target one franchisee's customers, or to pressure a franchisee into selling, invites a claim even where the wording seems to permit the outlet.

Neither rule turns a non-exclusive franchise into an exclusive one, and clearly worded reservations are generally enforced. That is why negotiation before signing matters more than argument afterwards. Franchisees also have a statutory right to associate under section 4, and franchisee associations often negotiate system-wide encroachment or impact policies.

Ontario does not require a franchisor to grant a territory, but it does require the franchisor to describe one accurately. Under section 6 of O. Reg. 581/00, the franchise disclosure document must include:

• a description of any exclusive territory granted to the franchisee;
• where exclusive territory is granted, the franchisor's policy on whether keeping it depends on sales, market penetration or another condition, and when the rights may be altered; and
• the franchisor's policy, if any, on proximity between an existing franchise and other franchises, other distributors using the brand, and franchisor-owned or franchised outlets selling similar products under a different trademark.

The document must also list the Ontario locations of franchises of the type offered. An agreement that does nothing more than designate a location, site or territory may be signed before the 14-day disclosure period has run. A territory promised in a sales meeting but missing from the documents, or an inaccurate proximity policy, can support rescission or damages for deficient disclosure or misrepresentation.

Territorial rules can also raise competition issues, though rarely for a typical Ontario system:

• Market restriction. Requiring a franchisee to sell only in its territory, or penalizing sales outside it, can be market restriction under section 77 of the Competition Act. The Competition Tribunal can intervene only if a major supplier or a widespread practice is likely to lessen competition substantially. Under section 77(6), a franchisor that supplies ingredients the franchisee processes into food or drink sold under the franchisor's trademark is deemed affiliated with the franchisee for this purpose, so no market restriction order applies between them.
• Franchisor-owned outlets. Where the franchisor also runs corporate units, a territorial split with franchisees is an arrangement between businesses that compete at the outlet level. The criminal conspiracy offence in section 45 covers territory allocation between competitors but has an ancillary restraints defence, and the Competition Bureau's draft enforcement guidelines of October 2025 say it generally assesses dual-distribution and franchise agreements under the civil provisions, while reserving section 45 for parties that agree as competitors to fix prices or allocate markets.
• Section 90.1 and private access. Since December 15, 2024, section 90.1 can reach agreements between non-competitors where a significant purpose is to lessen competition and the agreement lessens competition substantially, or is likely to, and since June 20, 2025 franchisees and rivals can seek leave to bring section 77 and 90.1 cases themselves.

Supply requirements raise the parallel questions covered under tied selling.

Points worth settling before signing:

1. Attach a map and a postal-code list, and say what happens if postal codes are redrawn.
2. Make reserved rights a closed list of defined venues and channels, not an open-ended right to use any other channel.
3. Ask for a revenue share, or a first right to operate, for any reserved-channel outlet or delivery-only kitchen inside the territory.
4. Tie any loss of exclusivity to objective targets with notice and a cure period, and convert to protected status rather than terminate.
5. Confirm that the territory passes with the franchise on a sale and survives renewal.

Franchisors building a system can start with our guide on how to franchise your business in Ontario, and Lamba Law's franchise law team drafts and reviews territory provisions for both sides.

Ngozi Eze signs a ten-year franchise for a chicken wing outlet in north Oakville. Her agreement grants a protected territory of 3 kilometres against new outlets of the brand, but reserves online ordering and non-traditional venues, defined as airports, campuses, hospitals, stadiums and travel plazas. Her store averages $78,000 in monthly sales.

In year three, the franchisor opens a delivery-only kitchen under the same brand 2.4 kilometres away and routes app orders from half of Ngozi's postal codes to it. Her sales fall 16 per cent over four months. The franchisor argues that the kitchen is a non-traditional venue and that delivery is online ordering.

Ngozi's lawyer reads the definitions closely. A delivery-only kitchen is not on the closed list of non-traditional venues, and the reservation of online ordering covers a sales channel, not a new physical outlet inside the 3-kilometre radius. Facing a breach of contract claim and a fair dealing argument, the franchisor agrees to route all orders from Ngozi's postal codes back to her store and to pay her 6 per cent of the kitchen's sales on any orders it delivers into her territory for the rest of the term. The dispute settles without litigation.