Buying a NZ Franchise: Check Restraints of Trade

Buying a franchise means planning for both your time in the business and what comes afterwards. A restraint of trade could restrict the work you do when you leave, even after an ordinary expiry or agreed sale. Before joining a franchise community in New Zealand, check whether the proposed restrictions fit your skills, location and future earning needs.

1. Identify what the restraint actually prevents

Do not look only for a clause headed ‘restraint of trade’. Restrictions may also appear under competition, confidentiality, customer relationships, assignment or obligations after the agreement ends. Ask your lawyer to read these provisions together, including any separate undertaking you are expected to sign personally.

Distinguish between restrictions that apply while you operate the franchise and those that continue afterwards. An obligation not to run a competing business during the agreement raises different practical questions from a ban that starts after you leave.

Build a checklist covering:

• Restricted activities: Does the clause prevent ownership, employment, consultancy, investment or helping someone else establish a competing business?
• Business definition: Is competition defined by the particular services you provide, or by a much broader range of activities?
• Geographical reach: Does it cover your premises, your territory, other franchise locations or a wider area?
• Duration: How long does each restriction last, and what event starts the clock?
• People bound: Does it apply to the franchisee company, you personally or other people signing related documents?
• Customer and staff contact: Are there separate restrictions on soliciting customers or recruiting employees?

Check whether a customer clause prohibits only active solicitation or also accepting unsolicited work. That distinction could matter greatly if your professional reputation predates the franchise.

2. Understand the New Zealand legal position

New Zealand has no franchise-specific legislation, statutory franchise disclosure regime or dedicated franchise registration requirement. Franchise arrangements operate under general law, including contract law, the Fair Trading Act 1986 and the Commerce Act 1986.

The Franchise Association of New Zealand has a Code of Practice and Ethics that binds its members, although membership is voluntary. Its requirements are not legislation applying to every franchise community. Code compliance does not, by itself, establish that a particular restraint is enforceable.

Under New Zealand restraint-of-trade principles, a contractual restriction must be justified by a legitimate protectable interest and be reasonable in its scope and circumstances. Protectable interests can include goodwill, confidential information and customer connections. Simply wanting to prevent competition is not enough.

The Contract and Commercial Law Act 2017 gives courts powers to modify unreasonable restraints in qualifying circumstances. Consequently, do not assume that an unusually broad clause can safely be ignored. Nor should you assume that signing it makes every restriction automatically enforceable.

Your lawyer should assess the wording and commercial context rather than offer a blanket answer based on duration alone. Geography, the nature of the business and the interests being protected all matter. Seeking an injunction or defending proceedings can also be costly, whatever the eventual outcome.

3. Test the clause against your next livelihood

Turn the legal wording into realistic scenarios. Imagine that your agreement expires and you want a job with another operator, start an independent business or continue working in your existing profession. Which options would remain available?

For a mobile service business, a restraint measured from every customer location may operate very differently from one measured from a single shop. An online business also needs careful analysis: ask how the geographical restriction applies to customers found or served digitally.

Use a map and a short written career plan. Identify where you live, where potential employers operate and which services you would need to offer to earn a living. Ask your lawyer to test those facts against the contract.

Then assess the financial consequences with your accountant. Would you need funds for retraining, relocation or a period without income from your usual work? Keep that personal contingency separate from the business’s operating cash. Do not base affordability on an assumption that the franchisor will waive the restraint later.

4. Negotiate clarity before committing

Raise concerns before signing, while there is still an opportunity to agree changes. Depending on the business, requests might include narrowing the competing activities, reducing the geographical reach or expressly excluding an existing, unrelated business you already operate.

Ask what happens following expiry, sale, non-renewal or a dispute. Check whether different restrictions overlap and whether customer or confidentiality obligations continue independently of the main restraint.

Any agreed exception should be recorded in the binding documents, with the relevant people and entities covered. A reassuring conversation is no substitute for clear contractual wording.

Practical takeaway: Before buying, map the restraint against your likely next job or business. Obtain independent New Zealand legal advice and resolve unacceptable restrictions before you commit—not when you are ready to leave.