Restraint of trade
What it means
Post-term restraints protect the franchisor's system, goodwill and other franchisees by preventing a departing franchisee from immediately setting up a competing business using the knowledge and customer relationships built during the franchise. A restraint usually specifies a duration (for example, 12 months), a geographic area (often around the former territory), and the activities restricted. To be enforceable at general law, a restraint must go no further than is reasonably necessary to protect a legitimate interest.
The 2025 Code adds a specific statutory limit. A restraint of trade clause is unenforceable after the agreement ends if the franchisee wanted to renew or extend on substantially similar terms and the franchisor refused, provided the franchisee was not in serious breach and did not receive genuine compensation for the goodwill. This stops franchisors from declining renewal and then using a restraint to lock the former franchisee out of the market.
This restriction applies to franchise agreements entered into, renewed, extended or transferred from 1 April 2025. It sits on top of the ordinary common-law rules, so even where the Code does not strike a restraint down, a court can still refuse to enforce one that is unreasonably wide in time or area.
In practice
A prospective franchisee should read the restraint clause before signing and understand exactly what they could and could not do if they exit, because it can significantly affect their ability to earn a living in the same industry afterwards. The Key Facts Sheet and disclosure document flag whether the agreement contains a restraint.
On exit, whether a restraint bites often turns on how the relationship ended. If the franchisor refused a genuine renewal request on similar terms and the franchisee was compliant and uncompensated, the 2025 Code may render the restraint unenforceable. Given the fact-specific nature of these clauses, legal advice at both entry and exit is common.
A real example
A franchisee runs a successful lawn-care franchise for six years and asks to renew on substantially the same terms. The franchisor refuses, intending to award the area to a relative, and does not compensate the franchisee for the goodwill they built. When the franchisor then tries to enforce a 12-month, 20-kilometre non-compete, the former franchisee relies on the 2025 Code to argue the restraint is unenforceable because renewal on similar terms was refused.
Restraint of trade — FAQs
Are restraint clauses allowed in Australian franchise agreements?
Yes, but they must be reasonable, and under the 2025 Code they are unenforceable in specific situations, such as where the franchisor refused renewal on substantially similar terms.
How long can a restraint last?
There is no fixed limit, but it must be no wider in time and area than is reasonably necessary to protect the franchisor's legitimate interests, or a court may refuse to enforce it.
When does the 2025 restraint protection apply?
To agreements entered into, renewed, extended or transferred from 1 April 2025, where the franchisee wanted to renew on similar terms, was not in serious breach, and was not genuinely compensated.
Where can I find out if my agreement has a restraint?
Check the franchise agreement itself, and the Key Facts Sheet and disclosure document, which must indicate whether a restraint of trade applies.
See the full franchise glossary, the Fee Index or our buyer guides.