Why Did I Lose the Territory Protections in my Area Development Agreement?

Why Did I Lose the Territory Protections in my Area Development Agreement?

by | Apr 17, 2019 | Blog, For Franchisees

Territory protections are a core feature of Area Development Agreements (aka Multi-Unit Operator Agreements). These agreements grant a franchisee a protected territory in which to open a stated number of franchises over a specified time period. Since it takes time to develop multiple locations, these agreements often preclude other franchisees from opening units within the development area during the development period. However, many franchisees misunderstand the scope of that protection thinking that it is permanent. It is only temporary.

Let’s say the area development agreement provides for 3 locations within a specified area. That area is protected from other franchisees during the development period. Once the schedule has been completed and the locations are open, that protection ends and is replaced by the territorial protection granted to each location in the franchise agreements. For example, if you have development rights to open 3 burger joints in Manhattan in New York City, once you have opened all 3 (or if you do not meet the development schedule), the rights to develop in Manhattan end along with the development area protections. At that point, the franchisor can open or permit another franchisee to open a location in Manhattan. The only territory protection you will have will be what is set forth in each of the franchise agreements signed in connection with each location which is typically a much smaller area (e.g., a 1-mile radius around each location).

It is very important for franchisees to get legal representation before entering into any agreement with a franchisor. An attorney can explain the provisions and advise on how they may impact the franchisee’s business. This is particularly important in the case of area development agreements where the franchisee is investing a substantial amount of money to develop multiple locations. In the case of territory protections, it is crucial to analyze whether the market can support additional franchises in the area and how it may impact the franchisee’s business plan and revenue projections. An attorney may also be able to help negotiate some provisions to make them more beneficial to offset some of the negatives of having more potential competitors.

If you are considering entering into an area development agreement, contact us to discuss how we can help you achieve your goals.

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