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Restrictive Covenant

Also known as: Non-Compete Agreement, Restrictive Agreement

Definition

A restrictive covenant is a legally binding contractual promise not to do something specific, commonly used to prevent competition with a business or restrict how property or land can be used.

Understanding restrictive covenants is essential for business owners creating estate plans, as these restrictions can significantly affect business succession options and the value of business assets in your estate.

What Does Restrictive Covenant Mean?

Restrictive covenants are negative obligations—promises not to do certain things rather than requirements to take action. They appear in three main legal contexts: property law, employment law, and business sale agreements. Under the doctrine of restraint of trade, any contractual term restricting someone's freedom to work or operate their business is presumed void unless it protects a legitimate business interest and is reasonable in scope, duration, and geographic reach.

In property law, restrictive covenants prevent landowners from using their land in certain ways, such as building additional structures or operating businesses. These covenants typically arise when land is sold and "run with the land," meaning they bind future owners regardless of how many times the property changes hands. Under Section 84 of the Law of Property Act 1925, landowners can apply to the Upper Tribunal (Lands Chamber) to have property covenants modified or discharged if they've become obsolete or impede reasonable land use.

In business contexts, restrictive covenants protect legitimate interests like customer relationships, confidential information, and purchased goodwill. Common types include non-compete clauses preventing competition, non-solicitation clauses restricting customer or employee poaching, and confidentiality obligations. Crucially, UK courts treat business sale covenants far more favourably than employment covenants. Employment covenants typically last 3-12 months and face strict judicial scrutiny, while business sale covenants can last 12-24 months or longer—sometimes several years—because they protect goodwill the purchaser has paid for.

For estate planning, restrictive covenants create both challenges and opportunities. If you sold a previous business, existing covenants may restrict what new business ventures you can include in your succession plan. David, 58, sold his IT consultancy for £850,000 with a 24-month non-compete covenant. When planning his will, he needed to ensure his new software business didn't breach this restriction, as violations could reduce the business value he passes to his daughter Sarah. Conversely, when passing a family business to the next generation, implementing restrictive covenants in partnership or shareholders' agreements protects business goodwill from departing family members. Emma and her brothers updated their partnership agreement governing their £2.4 million manufacturing business to include 18-month non-compete and 24-month non-solicitation covenants, ensuring that if any family member's heir later leaves the business, they cannot immediately compete and damage the value for remaining partners.

Whether restrictive covenants bind your beneficiaries or executors after death depends on specific covenant wording and your business structure. Some covenants are personal to you and end at death, while others may restrict your estate or successors. Executors administering business assets should review all business agreements with a solicitor to understand what restrictions apply and how they affect estate administration and distribution.

Common Questions

"What's the difference between a restrictive covenant in property and in business?" Property restrictive covenants prevent certain uses of land (like building or business activity), while business restrictive covenants prevent former owners, partners, or employees from competing after leaving. Both are legally binding, but business sale covenants are typically easier to enforce in court than employment covenants because courts recognise the need to protect purchased goodwill.

"How long do restrictive covenants last in business sales?" In business sales, restrictive covenants can last significantly longer than employment covenants—sometimes 12-24 months or even longer if justified by the business goodwill being protected. Courts are more willing to enforce lengthy business sale covenants than employment ones, with some cases upholding restrictions lasting several years when large sums were paid for goodwill.

"Can restrictive covenants affect my estate planning?" Yes, if you own a business with restrictive covenants, they can affect your estate planning significantly. These restrictions may limit how you structure business succession, affect the business's value in your estate, and potentially bind your beneficiaries or executors. You should consider existing restrictive covenants when planning to pass your business to the next generation.

Common Misconceptions

Myth: Restrictive covenants in employment contracts are never enforceable—they're not worth the paper they're written on.

Reality: While employment restrictive covenants must be reasonable, UK courts increasingly enforce them when they protect legitimate business interests and are properly drafted. Senior employees with access to confidential information or customer relationships are particularly likely to have enforceable covenants. However, business sale covenants are far more readily enforced than employment covenants because parties negotiate on more equal footing and the covenant protects purchased goodwill.

Myth: If I sell my business, restrictive covenants only apply for 6-12 months maximum.

Reality: When selling a business, restrictive covenants protecting the purchaser's goodwill can last far longer than employment covenants—sometimes 2-3 years or even longer. UK courts have upheld business sale covenants lasting several years when substantial goodwill was purchased. Unlike employment covenants (typically 3-12 months), business sale covenants can be much longer because the purchaser has paid for goodwill and courts respect freedom of contract between business sellers and buyers.

  • Non-compete Clause: The most common type of restrictive covenant that specifically prevents direct competition with a business after leaving or selling.
  • Partnership Agreement: Business agreement that commonly contains restrictive covenants to protect remaining partners when one partner leaves or dies.
  • Business Succession Planning: Estate planning process that must account for both existing restrictive covenants limiting options and new covenants needed to protect business value.
  • Lock-in Provision: Related business restriction that prevents shareholders from selling shares for a specified period, serving a different protective purpose than restrictive covenants.

Need Help with Your Will?

If you own a business, understanding how restrictive covenants affect your estate planning is crucial. These restrictions can significantly impact business succession options and the value you can pass to your beneficiaries.

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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.