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Post-termination clauses in franchise agreements can prevent franchisees from taking specific actions when the agreement ends. They restrict the business activities of former franchisees. Such clauses might, for example, prevent them from opening competing businesses for a period following the end of the agreement. If a franchisee breaches a post-termination clause, the franchisor can bring legal action against them. This article will explain post-termination clauses, their purpose and whether they are legally enforceable.
Post-Termination Clauses
Post-termination clauses (also known as post-termination restrictions) are restrictive covenants. Restrictive covenants impose obligations on parties not to do something. They are clauses of a contract that restrict parties from taking a particular action.
In franchising, franchisors use restrictive covenants to prevent franchisees from taking particular actions. Such restrictions can prevent franchisees from taking specific actions even beyond the duration of the franchise agreement, hence the term ‘post-termination’ clauses. They remain enforceable even when the franchise agreement is over.
For example, a franchisor might prevent a franchisee from opening a business within the same industry for a specified time following the end of the agreement.
The Purpose of Post-Termination Clauses
The purpose of post-termination clauses is to protect the franchisor’s brand. Franchisees learn a lot about the franchisor’s brand and the industry in which they operate their business. Franchisors equip franchisees with much knowledge and skills, including their trade secrets.
Franchisors include such restrictions in their franchise agreements to protect their business interests by preventing franchisees from using their newfound knowledge and skills for purposes that would compete with the franchisor’s business interests.
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Post-Termination Clause Example
For example, imagine you are a franchisee of a fast-food brand based in London. The franchisor has built its business in the South East, and its franchisees operate their fast-food businesses on many streets across the city. Your franchisor included a post-termination clause in the franchise agreement that stipulates that you cannot open a restaurant within London for the duration of the franchise agreement plus six months following its end.
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As you signed the agreement, which included this clause, you could not open another restaurant within the area for at least six months following the end of the franchise agreement. You would be unable to establish a varied portfolio of London-based restaurant businesses for the duration of the franchise agreement and for some time following the end of the contract. If you opened another restaurant in London within the restricted timeframe, the franchisor could bring legal action against you. Such action can be expensive to handle and may result in you owing damages to the franchisor.
These clauses can have a significant impact on your business activities. For this reason, you should thoroughly read a franchise agreement before signing. Seek legal advice if necessary. Seeking legal advice before signing can help you avoid costly legal disputes further down the line by:
- allowing you to make an informed decision about whether the franchise opportunity is viable; and
- assisting you to understand the implications of restrictive covenants so you can consider whether the opportunity aligns with your long-term business goals.
Legal Developments
Recently, some legal developments around restrictive covenants in franchise agreements have occurred. In 2022, a franchisee challenged a post-termination clause, and the Court of Appeal ruled it was unenforceable because it was unreasonably large in its scope.
The scope of an enforceable post-termination restriction depends on the franchised business’s circumstances and interests. Franchisors should strongly consider seeking legal advice about the terms of their franchise agreements. A lawyer can advise on what to do if it seems necessary to include post-termination restrictions in franchise agreements.
Key Takeaways
In franchising, franchisors use post-termination restrictions to protect their business interests. They restrict franchisees from taking specific actions for a particular duration following the end of the franchise agreement. For example, they can prevent former franchisees from opening a competing business within the same industry for some time following the end of the contract.
In a recent case, the Court of Appeal ruled that one post-termination restrictive covenant included in a franchise agreement was unenforceable as it was too broad in scope. For this reason, franchisors should strongly consider seeking legal advice when drafting the franchise agreement. Likewise, franchisees should carefully read franchise agreements and seek legal advice before signing.
If you would like advice about post-termination clauses in your franchise agreement, LegalVision’s experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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