Post-term restraint clauses are common in franchise agreements.

They are intended to prevent a former franchisee from immediately establishing or joining a competing business, using the franchisor’s confidential information or taking advantage of the goodwill and customer connections developed within the franchise system.

However, recent changes to the Franchising Code of Conduct impose further restrictions on when these clauses can be included and enforced.

Franchisors should not assume that a restraint is valid simply because it appears in a signed franchise agreement.

What is a Restraint of Trade Clause?

A restraint of trade clause limits what a franchisee may do after the franchise agreement ends.

For example, it may prevent the former franchisee from:

• Operating a competing business.
• Working for or assisting a competitor.
• Soliciting customers, employees or other franchisees.
• Conducting particular activities within a defined area.
• Competing for a specified period after leaving the franchise system.

These clauses are commonly drafted as “cascading” restraints containing several alternative periods, geographical areas and prohibited activities.

A restraint is not automatically valid merely because the franchisee agreed to it. It must be directed towards protecting a legitimate business interest and must not go further than reasonably necessary to protect that interest.

What Changed on 1 April 2025?

The new Franchising Code introduced additional restrictions applying to franchise agreements entered into, renewed, extended or transferred on or after 1 April 2025.

Under the Code, a franchisor must not enter into a franchise agreement containing a restraint that would apply following expiry and non-renewal where all of the following circumstances exist:

• The agreement contained an option for the franchisee to renew or extend.
• Before expiry, the franchisee gave written notice seeking renewal or extension.
• The franchisee requested substantially the same terms as those contained in the franchisor’s current agreement and applying to other franchisees or prospective franchisees.
• The franchisee satisfied the conditions for renewal or extension.
• Immediately before expiry, the franchisee was not in serious breach of the franchise agreement or a related agreement.
• During the term, the franchisee did not infringe the franchisor’s intellectual property or breach its confidentiality obligations.
• The franchisor decided not to renew or extend the agreement.
• The franchisee either received only nominal or inadequate compensation for goodwill or had no contractual right to claim compensation for goodwill.

Where all those conditions are met, the franchisor must not rely, or purport to rely, on the restraint.

The Change Does Not Prohibit Every Franchise Restraint

The new rules do not mean that every restraint of trade clause in a franchise agreement is invalid.

The Code restriction is directed at a particular situation: a compliant franchisee seeks renewal or extension, the franchisor refuses, and the franchisee does not receive genuine compensation for the goodwill it has developed.

The policy behind the change is readily understandable. A franchisor should not generally be able to:

1. Refuse to allow a compliant franchisee to continue operating within the system.
2. Retain the benefit of the goodwill developed by that franchisee.
3. Provide no genuine compensation for that goodwill.
4. Prevent the franchisee from earning a living in the same industry.

Restraints may still have a role in other circumstances, including where an agreement is terminated early because of a franchisee’s breach.

However, even where the specific Code prohibition does not apply, the restraint must still be reasonable and comply with applicable contract law, the Australian Consumer Law and the Franchising Code.

Including the Clause can itself Create Exposure

One of the most important features of the new Code is that the risk does not arise only when the franchisor commences legal proceedings to enforce the restraint.

A franchisor may contravene the Code by entering into an agreement containing a restraint that would apply in the prohibited circumstances.

There is a separate prohibition against relying, or purporting to rely, on such a restraint.

Exposure may therefore arise when a franchisor:

• Issues a breach or demand letter referring to the restraint.
• Threatens an injunction against the former franchisee.
• Tells the franchisee it cannot conduct a competing business.
• Uses the restraint to discourage the franchisee from seeking renewal rights.
• Requires the franchisee to sign a related deed containing the restraint.
• Incorporates a restraint through an operations manual or another document.

Franchisors should therefore review not only the primary franchise agreement, but also related documents, manuals, renewal documents, transfer documents and termination deeds.

The Importance of Goodwill Provisions

The new rules also place greater importance on how franchise agreements deal with goodwill.

Franchisors should review whether their agreements:

• Recognize that the franchisee may develop goodwill.
• State who owns or receives the benefit of that goodwill.
• Permit the franchisee to claim compensation when renewal is refused.
• Explain how compensation will be calculated.
• Provide a genuine mechanism for determining the value of goodwill.

A clause stating that the franchisee has no interest in goodwill may not solve the problem. In fact, the absence of a right to claim compensation is one of the circumstances that can trigger the Code’s restraint prohibition.

Similarly, merely paying a nominal amount may not be sufficient. The Code refers to genuine compensation for goodwill.

Cascading Clauses Are Not Automatically Safe

Many franchise agreements contain alternative restraints, such as:

• 24, 18, 12, 6 or 3 months.
• Within 20, 10, 5 or 2 kilometers.
• Restrictions covering a broad range of competing or related activities.

This drafting technique is intended to allow a court to enforce a narrower restraint if a broader restraint is unreasonable.

However, including multiple alternatives does not eliminate the need for the restraint to be proportionate.

The franchisor should be able to justify the duration, geographical area and activities covered by each restraint it may seek to enforce.

A nationwide restraint is unlikely to be justified merely because the franchise system operates nationally. The relevant question is usually what protection is reasonably required in connection with the particular franchisee, territory, customers, confidential information and business.

What About Older Franchise Agreements?

The new restraint provisions generally apply to agreements entered into, renewed, extended or transferred on or after 1 April 2025.

An agreement that existed before that date may continue to be governed by the former Code until it is terminated, renewed, extended or transferred.

However, franchisors should not simply leave older templates untouched. A renewal, extension or transfer may bring the agreement within the new Code.

The restraint should therefore be reviewed before:

• Granting a renewal.
• Extending the agreement term.
• Approving a transfer.
• Issuing a replacement agreement.
• Materially restructuring the parties’ rights and obligations.

Practical Steps for Franchisors

Franchisors should review their agreements and procedures by:

1. Identifying every restraint in the franchise agreement and related documents.
2. Including a clear carve-out where the Code prohibits the restraint from applying.
3. Reviewing renewal and extension procedures.
4. Ensuring franchisees can give written notice seeking renewal.
5. Defining and documenting the conditions for renewal.
6. Reviewing how the agreement deals with goodwill and compensation.
7. Ensuring each restraint protects a genuine and identifiable business interest.
8. Reconsidering broad geographical areas, lengthy periods and extensive prohibited activities.
9. Training staff not to threaten reliance on a restraint without legal review.
10. Reviewing template correspondence used when agreements expire or are not renewed.

Practical Steps for Franchisees

Before signing, renewing or extending an agreement, franchisees should understand:

• What activities will be restricted.
• How long the restraint may operate.
• The geographical area it covers.
• Whether it prevents employment as well as business ownership.
• Whether an option to renew exists.
• What conditions must be met to obtain renewal.
• How the agreement deals with goodwill.
• Whether compensation is available if renewal is refused.
• Whether the restraint applies differently depending on how the agreement ends.

Franchisees approaching the end of their term should also ensure that any request for renewal or extension is made in writing and within the time required by the agreement.

The Key Message

Restraints of trade remain available in franchising, but they cannot be treated as standard boilerplate.

A clause may create regulatory exposure when it is included in the agreement, when it is referred to in correspondence and when enforcement is threatened.

Franchisors should ensure that their restraints are carefully tailored, properly justified and expressly subject to the circumstances in which the Franchising Code prevents them from applying.

For franchisees, the restraint should be considered together with renewal rights, end-of-term arrangements and compensation for goodwill—not as an isolated clause at the back of the agreement.