Under what circumstances would a franchisor reduce the size of a franchisee’s trading territory?

The first thing to say is that not all franchises allocate a specific territory to franchisees but most do.  Within a franchisee’s territory franchisees are required to promote and extend their franchised business so what franchisees cannot do is to achieve a certain level of turnover within their territory with which they are happy and then decide that they do not need to carry on growing their business.  That is often referred to as the “comfort zone” and it is a challenge for most franchisors to ensure that franchisees continue to actively market their business even when they have a successful business.

If a franchisor believes that franchisees are not continuing to grow their business because they have hit their comfort zone, then they will point out that the franchisee is in breach of one of the contractual provisions in the franchise agreement which requires the franchisee’s business to be grown. Technically, if that breach continues the franchisor would be in a position to seek damages from the franchisee and eventually to terminate the franchise agreement.

As a result, very often franchisors and franchisees negotiate a solution and that solution can involve agreeing a reduction in the franchisee’s territory to the area where the franchisee is actively marketing and has the majority of his customers. If there is no provision in the franchise agreement which entitles the franchisor to reduce the territory allocated to the franchisee, then the franchisor would have no right to do so without the franchisee’s agreement.  As a result, increasingly franchise agreements contain an express right in favour of franchisors to reduce the franchisee’s territory in certain situations.