How to Enforce a Restrictive Covenant in Business Sale Agreements

When a business is sold in England and Wales, restrictive covenants are commonly included in the sale agreement to protect the value of the business being acquired. These covenants limit the seller's ability to compete with the buyer, solicit former customers, or recruit staff after completion. However, simply including restrictive covenants in a contract does not guarantee they will be enforceable. This guide explains what restrictive covenants are, the legal principles that govern their enforceability, and the steps a buyer can take to enforce them if they are breached.

What Is a Restrictive Covenant in a Business Sale?

A restrictive covenant in the context of a business sale is a contractual term in which the seller agrees to limit certain competitive activities after the sale. Common types include:

• Non‑compete clauses – prevent the seller from setting up or working in a similar business for a period after sale.
• Non‑solicitation clauses – restrict the seller from soliciting former customers or suppliers of the business.
• Non‑poaching clauses – stop the seller from recruiting or employing staff who worked in the business that was sold.

These are designed to protect the buyer's goodwill and proprietary interests acquired in the transaction.

Legal Principles Governing Enforceability

Under English law, restrictive covenants are considered restraints of trade and are void and unenforceable by default unless they meet certain conditions. The courts apply the following basic tests:

1. Legitimate business interest: The buyer must demonstrate that the covenant protects a legitimate interest such as customer relationships, confidential information or workforce stability.
2. Reasonableness: The restriction must be reasonable as to duration, geographic area, and scope of activity, and not wider than necessary to protect that interest.
3. Public interest: The restriction must not be contrary to public policy, for example by unnecessarily restricting competition or an individual's ability to earn a living.

In business sale contexts, courts may allow longer or wider restrictions than in standard employment contracts because bargaining power is more equal and the seller has usually received substantial consideration in return. However, overly broad covenants-such as unreasonable geographic reach or excessively long durations-are likely to be struck down.

Drafting a Covenant That Can Be Enforced

The best chance of enforcement starts before the sale is concluded. Key drafting considerations include:

• Clear definitions: Precisely define the restricted business activities, the relevant customers, and what constitutes competition.
• Appropriate duration: For business sales, covenants often run for up to three years, but this should be justified based on the nature of the business and commercial circumstances.
• Geographic limits: Restrict activities only within the geographic area where the business actually operates.
• Layered protections: Use separate covenants (e.g., non‑solicitation and non‑compete) rather than a single broad clause, so that a court can sever unreasonable parts while upholding the rest.

Proper drafting increases the chances of enforceability and reduces the likelihood of disputes after completion.

Steps to Enforce a Restrictive Covenant

If the buyer believes a seller has breached a restrictive covenant, the following steps are typically taken.

1. Review the Agreement and Confirm Enforceability

Before any action, it is essential to confirm that:

• The covenant is valid and clearly worded.
• The covenant protects a legitimate interest.
• The timeframe, activities and geography are reasonable.

This usually requires consultation with legal advisers (solicitors) experienced in commercial contracts.

2. Gather Evidence of the Breach

Effective enforcement depends on clear evidence. Examples include:

• Emails or communications showing the seller soliciting former customers.
• Public records or marketing materials indicating a competing business has been established.
• Employee evidence of recruitment activity.

Documenting conduct accurately and lawfully is crucial.

3. Send a Letter Before Action

Often the first formal step is to instruct solicitors to send a letter before action. This letter:

• Identifies the covenant and the alleged breach.
• Requests that the seller stop the prohibited behaviour.
• May seek an undertaking-a binding promise to comply.

Many disputes are resolved at this stage without court involvement.

4. Seek an Injunction

If the conduct continues and there is a risk of ongoing damage to the buyer's business, the buyer can apply to the High Court or Business and Property Courts for an injunction. An injunction is a court order requiring the seller to cease the restricted conduct immediately, often on an interim basis before a full hearing.

5. Claim Damages for Loss

If the buyer has suffered quantifiable loss due to the breach-such as lost customers or revenue-they may also pursue a claim for damages. Successfully proving financial loss can be complex and usually requires careful evidence.

Time Limits and Practical Considerations

There is no fixed statutory time limit for enforcing restrictive covenants in business sale agreements; however, it is generally better to act promptly after a breach is discovered. Delays can weaken a buyer's position and strengthen defences such as waiver or acquiescence.

Risks and Challenges

Enforcement is not guaranteed. Key risks include:

• The court deciding a covenant is unenforceable because it is too broad.
• High legal costs if the dispute goes to trial.
• Difficulty proving actual harm or financial loss.

Courts may strike down unreasonable covenants entirely rather than partially rewriting them.

Key Takeaways

Enforcing a restrictive covenant in a business sale agreement in England and Wales requires:

• Ensuring the covenant protects a legitimate business interest and is reasonable in scope, duration and geographic reach.
• Gathering clear evidence of the breach.
• Using formal legal steps such as a letter before action, undertakings, injunctions and, if necessary, claims for damages.

Careful drafting at the outset and early legal advice significantly increase the chances of successful enforcement.

James William Steven Parker

James is the founder of UKLegalGuides.com and a former agent at the Ministry of Justice (UK). With a background in processing legal claims, he launched this platform to make the laws of England and Wales accessible to everyone.