How to negotiate a ‘radius restriction’ in a contract

Commercial tenants, managers, licensees and franchise operators are often asked to sign a “radius restriction” as part of a contract. This limits them from operating a similar or competing business within a certain proximity of the current business.

These restrictions are fair – up to a point. But if you’re negotiating one, on either side, it’s important to think carefully about the language in the contract so you don’t create confusion or disputes later.

Here are some important things to consider:

► Many radius restrictions apply not just to the operator, but to “affiliates” of the operator. It’s not always clear what an affiliate is, so it’s good to spell it out. In theory, affiliates could include investors, parent companies, sister companies owned by a common parent, etc. Affiliates could also include investors who come aboard after the contract is signed. A broad “affiliate” clause could turn away potential or current investors if they have other nearby businesses or are thinking of acquiring them.

► Be clear as to when the restriction begins. If a restriction is for three years, then it could make a big difference whether the three-year period begins when the contract is first signed or not until the business is actually operating.

►Does an operator violate the contract if he or she takes steps to start a competing business while the restriction is in effect, but doesn’t actually open it until afterward? This should ideally be made clear in the contract.

► Consider including a map with the “restricted area” drawn on it, or else a street-by-street description. If you just say “within a quarter-mile radius” or “within the downtown business district,” it could be unclear whether a competing business is within or outside the limits.

► Remember that the terms are negotiable. The owner might be tempted to include as many restrictions as possible, but it’s best to determine what restrictions are actually necessary to protect the business’s interests, because overly broad restrictions might scare away partners. It might be possible to compromise on the restricted area, the length of the restriction, the roles the operator may play in other ventures, what restrictions apply to “affiliates,” etc. Also, an owner could trade off a shorter or less onerous restriction if the operator agrees to other terms or meets a specific future goal.

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