Summary

• Franchise agreements often contain restrictive covenants that limit what a franchisee can do during and after the contract.
• Buyers are sometimes unaware that, due to restrictive covenants contained in the Franchise Agreement, they may be prevented from starting a competing business, working in the same sector, or expanding their operation.
• English law allows restrictive covenant clauses only if they protect a legitimate business interest and are reasonable in time, scope, and geography.
• Careful review and early legal advice can prevent costly disputes and loss of commercial freedom.

In my experience, most people buying a franchise are excited about the brand, the financial projections, and the promised support. Little time is allocated to reading the restrictive covenants in franchise agreements. Although one of the less ‘sexy’ parts of the franchise contract, restrictive covenant clauses can limit your commercial freedom long after the franchise ends. As a franchisee, you may discover too late that you cannot open a similar business in the same town, city, or even country, work for a competitor, or expand your own enterprise without consent.

What is a restrictive covenant in franchise agreements?

Restrictive covenants are contractual promises that prevent a former franchisee from competing with the network. They protect the franchisor’s goodwill, customer base, brand reputation, and confidential information (although a separate confidentiality agreement may also exist).

Restrictive covenants in franchise agreements typically fall into three groups.

1. Non-compete clauses which restrict the franchisee from running a competing business during the term and for a defined period after the agreement ends.
2. Solicitation and dealing in which a former franchisee may be barred from approaching customers, suppliers, or staff with whom they dealt with when they were running the franchise.
3. Territory and business scope that prevent a franchisee from operating outside the assigned area or introducing new products or services without approval.

Some agreements also impose supply obligations that compel the franchisee to buy all goods from approved sources.

Are restrictive covenants in franchise agreements legally enforceable?

The doctrine of restraint of trade is a principle that people should be free to follow their trade and use their skills without undue interference. A restrictive covenant in franchise agreements falls foul of this principle. Therefore, any contractual term restricting a franchisee’s activities after termination of the franchise relationship is void for being a restraint of trade and contrary to public policy, unless the franchisor can show that:

• It has a legitimate proprietary interest that it is appropriate to protect.
• The protection sought is no more than is reasonable, having regard to the interests of the parties and the public interest.

The common law position, set out in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535, confirms that a restraint is void unless it goes no further than necessary to protect those interests. The same principle was reinforced in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1967] UKHL 1, where the House of Lords stressed that for a restrictive covenant to be enforceable, it must be proportionate.

What is the impact of restrictive covenants on franchisees?

I am regularly asked to advise franchisees who have underestimated the scale and impact of a restrictive covenant contained in their franchise agreement. For example, I commonly come across clauses that ban a former franchisee from taking part in a similar business within a radius of several miles for six to twenty-four months after termination. Some clauses even prevent my clients from working as employees in the same industry within that area. A franchisee who assumes they can leave and open their own competing business in the same location is very often mistaken.

How do the courts decide if a restrictive covenant in franchise agreements is enforceable?

The Courts will scrutinise any restrictions carefully. A leading modern authority in the franchise context is Dwyer (UK Franchising) Ltd v Fredbar Ltd [2022] EWCA Civ 889. In this case, the franchisor Dwyer (UK Franchising) Ltd (“Dwyer”), operating under the “Drain Doctor” brand, entered into a ten-year franchise agreement with the franchisee Fredbar Ltd (sole director/shareholder Shaun Rowland Bartlett). The agreement included post-termination restrictive covenants preventing Fredbar/Bartlett, for one year after termination, from engaging directly or indirectly in a “similar or competitive” business within the exclusive franchise territory or within five miles of it.

After eighteen months of trading, Dwyer terminated the agreement and sought to enforce the restrictions. The High Court held the covenants to be unreasonable and thus unenforceable; Dwyer appealed.

The Court of Appeal dismissed the appeal, upholding the decision that the restraints went further than reasonably necessary to protect goodwill, given the franchisee’s inexperience, lack of bargaining power and the early termination of the franchise when little goodwill had been built. The court confirmed that franchise agreements are not a special category exempt from the usual restraint-of-trade analysis and that inequality of bargaining power is a significant factor when deciding if the restrictions are legally enforceable.

Another key feature of enforcement is severance. In Tillman v Egon Zehnder Ltd [2019] UKSC 32, the Supreme Court confirmed that a court may remove offending wording but leave the rest of a restraint intact, so long as the remaining clause still makes sense and it is not necessary to add words or modify any existing wording. This may make it harder for franchisees to defeat a covenant entirely, even where part of the clause is too broad.

How can franchisees reduce their exposure to restrictive covenant risk?

For a prospective franchisee, there are practical steps that reduce exposure. Before signing, a buyer should review every restrictive covenant for duration, geography, scope, and clarity. A six to twelve-month restriction tied to a small territory will be easier to justify than a nationwide ban lasting several years. Clauses that restrict ordinary employment deserve particular scrutiny, as you could be at risk of unemployment and financial hardship. A buyer should also check that the restraint aligns with the goodwill they have paid for; courts often compare the strength of the brand and the size of the territory when assessing reasonableness.

Independent legal advice is essential. Franchising involves personal guarantees, long-term terms, and reputational commitments. A buyer who signs without understanding the restraints risks being locked out of their own industry. If a franchise dispute later arises, enforcement actions can be expensive. For example, if you breach a restrictive covenant, the franchisor may pursue an injunction against you and claim damages.

Wrapping up

Restrictive covenants are not inherently unfair. They serve a commercial purpose and help protect franchise networks. Problems arise where buyers misunderstand their impact. To minimise your risk exposure, always get independent legal advice on the franchise agreement before you sign. With those protections in place, a franchisee can enter the relationship with confidence and exit it without unpleasant surprises.

Our Virtual In-House Legal Counsel service can draft and/or check your franchise agreements to ensure they protect your interests.

To learn more about how our team can assist you, please email us at info@43legal.com or phone 0121 249 2400.

The content of this article is for general information only.  It is not, and should not be taken as, legal advice.  If you require any further information in relation to this article, please contact 43Legal.

FAQs

Can a franchise agreement stop me from opening a competing business after I leave?Yes. Many agreements include post-termination non-competes. They are enforceable only if reasonable, as confirmed in Nordenfelt and later cases.

How long can a non-compete last in a franchise agreement
In practice, courts often consider six to twelve months reasonable, depending on the facts.

Can I be stopped from working for a competitor as an employee?
Yes, if the clause is reasonable in scope and geography. Some clauses are too broad, which leaves them vulnerable to challenge.

What if part of the clause is unreasonable
The court may remove the excessive words and enforce the rest, as confirmed in Tillman v Egon Zehnder Ltd.

Melissa Danks is the founder of 43Legal. She has over 20 years’ experience as a solicitor working within the legal sector dealing with issues relating to risk management, dispute resolution, and advising in-house counsel in SMEs and large companies. Melissa has extensive expertise in providing practical, valuable, modern legal advice on large commercial projects, joint ventures, data protection and GDPR compliance, franchises, and commercial contracts. She has worked with stakeholders in multiple market sectors, including IT, legal, manufacturing, retail, hospitality, logistics and construction. When not providing legal advice and growing her law firm, Melissa spends her time running, walking in the countryside, reading and enjoying downtime with close friends and family.