If you're selling off property in the vicinity of your own business, you will want to restrict the buyer from opening up in competition to you. Solicitor Gary Pickard explains how the law can help
The problem
I own a small chain of Italian restaurants and coffee shops and plan to sell off the coffee shops to concentrate on the restaurant side of the business. But given their proximity to each other, I am worried that the future buyer will compete with me. What can I do?
The law
Generally, it is acceptable to take steps to prevent properties you have sold from being used for purposes that compete with your retained business.
It is common for restrictive covenants to be imposed on properties sold. A restrictive covenant is a legal control imposed by the seller on the property sold to benefit one or more properties retained by the seller.
However, to be an enforceable real estate restrictive covenant, the control must benefit a property and not merely the occupier of the property. A prohibition against use for certain businesses is one which probably benefits the occupier rather than the property.
Expert advice
The key is not just to rely on restrictive covenants, but to use a chain of direct contractual obligations between the seller and the buyer. This can be enforced outside the rules applying to real estate restrictive covenants. Usually, obligations are reinforced by entering restrictions on the registered titles of the properties sold, as this provides protection against a failure by the buyer to enter into such direct covenants. This ensures that the Land Registrar does not process a third-party application for a transfer, lease, charge, etc, unless and until it can be demonstrated that specified steps have been taken - eg, that the new owner has entered into the required direct contractual obligations with the seller.
Check list
In order to be enforceable, prohibitions need to be clearly drawn, since the courts will usually interpret any vagueness against the party that was in control of the negotiations, in this instance, the seller.
Questions to answer include:
● What exactly are the competing uses that you want to prevent? Care needs to be taken when describing these, as prohibiting certain uses might have a negative effect on the valuation of the property.
● Do you want the restriction to last forever, or for only a limited period?
● Who currently owns the property to be sold, and - in the case of a company or similar entity - what will their status be after the sale? You should be careful to ensure that the party able to enforce the restrictions will continue to be in existence once the sale is completed. This might be achieved, for example, by making the ultimate parent company in a group the party entitled to the benefit of the restrictions. However, that party must not be too remote or it might have difficulty establishing an actionable loss in the event of a breach of the restriction.
● Is the restriction personal to the seller, or is it transferable to future buyers?
Beware!
It is fundamental that appropriate time and expense is invested in policing the restrictions on use. If it is necessary to seek an injunction to prevent a competing use in breach of the restriction, you will need to act quickly. Any delay between your becoming aware of the breach and applying to the courts could lead the courts to conclude that an award of damages is an appropriate alternative.
Getting the detail correct is vital in securing an enforceable set of obligations that will bind not only the buyer, but also its successors.
Contact
➔ Gary Pickard, senior assistant solicitor, hotels and leisure group, Field Fisher Waterhouse
020 7861 4882
gary.pickard@ffw.com