Does a radius restriction stop me opening nearby after I sell?
It can, if you signed one. A radius restriction is a promise in the sale agreement, so its distance, length and the activities it covers come from that document. Whether a court would enforce it is a legal question, and in Ontario staying on as an employee changes which rules apply.
A radius restriction is a promise by the seller not to run a competing business within a stated distance of the business sold. Whether it stops you depends on the words you agreed to. Nothing here says whether a particular clause would be enforced; that is a legal question for a lawyer in your province who has read the agreement.
It is a term of the contract
BDC describes a non-compete agreement as a covenant in which the vendor promises not to take part in a competing business for a certain number of years after closing. A radius clause is the geographic part of that promise. Read the distance and how it is measured, the start date and length, and what counts as competing. Ask whether owning, working for, lending to or investing in a competitor all count, whether it binds you personally or only the selling company, and what the buyer may do if it is breached.
If you stay on in Ontario
Ontario’s Employment Standards Act, 2000 s.67.2(1) says no employer shall enter into an employment contract or other agreement with an employee that includes a non-compete agreement, and s.67.2(2) makes a non-compete agreement made in breach void. Section 67.2(3) sets out an exception. It applies to a sale of a business, or part of one, where the purchaser and seller agree as part of the sale that the seller will not compete with the purchaser’s business after the sale, and the seller becomes the purchaser’s employee immediately after the sale. Executives are excepted separately. Other provinces run their own employment rules.
How the price is split
Income Tax Act s.68 deals with an amount that can reasonably be regarded as being in part consideration for a disposition of property, for services, or for a restrictive covenant. The part that can reasonably be regarded as consideration for each is deemed to be received for that item, irrespective of the form or legal effect of the contract or agreement. How a sale price is allocated to a covenant is therefore a tax question as well as a drafting one, so raise it with your accountant before you sign. For the wider legal picture, see whether non-competes are enforceable in Canada.
Sources
This answer is checked against primary sources. Links were last confirmed on the dates shown.
- 01Business Development Bank of CanadaGovernmentMajor pitfalls to avoid when negotiating a purchase agreement
- 02Government of OntarioGovernmentEmployment Standards Act, 2000, S.O. 2000, c. 41
- 03Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
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