We are regularly asked to provide advice on restrictive covenants, either in putting them into place or advising on their enforceability. In doing so, we often find that people have preconceptions about them, many of which are incorrect or are based upon a very black and white view of the legal position. In many cases the advice which we provide is not at all what our clients expect to hear.
So, what are restrictive covenants?
In the context of a dental practice, restrictive covenants are a set of provisions which are designed to prevent someone connected with the practice from taking certain steps which might damage the practice in some way.
The covenants are most likely to apply for a period after someone leaves the practice, and are most likely to be seen in the following situations:
- When an associate or employee leaves a practice (in which case the principal will have the benefit of the covenant)
- When a principal leaves, either on sale (in which case the buyer can enforce the covenants) or on retiral from a partnership (the other partners will be the beneficiaries of the covenants in this situation).
What will the covenants cover?
Every covenant differs, but commonly they will prevent one or more of the following:
- Soliciting patients from leaving the practice
- Practising dentistry within a radius of the practice premises
- Soliciting employees or dentists from leaving the practice
- Practising under the same or a confusingly similar practice name
Do restrictive covenants require to be in writing?
Absolutely. The law doesn’t imply any covenants when someone leaves a practice, and in the absence of specific restrictions being agreed, they would have free rein to do whatever they like.
But restrictive covenants aren’t enforceable are they?
This is a very common misconception which isn’t correct. Covenants are enforceable, it being recognised by the courts that a business owner has a legitimate interest in protecting the value in their business. Practice principals are no different. They own their goodwill and are entitled to take steps to maintain it.
So as a principal I should ensure that we have very wide covenants in our associate agreements, etc?
Again this is an area where there is a lot of misunderstanding. Often our principal clients want to provide for very strong restrictions eg that an associate can’t move to a practice within a broad radius, or for a significant period of time (say 5 years) they can’t treat patients of their original practice. However, this is where enforceability does become an issue. The courts take the view that a covenant shouldn’t go further than is reasonably necessary to protect the goodwill of the practice. Going beyond that risks the covenant being viewed as unreasonable, and therefore unenforceable. So, however counter intuitive this may seem, our general advice is to keep covenants as narrow as possible, as that improves the likelihood of them being capable of being enforced.
The extent to which a covenant is seen as reasonable will also vary from one case to another. Generally, there is more interest in enforcing a covenant against the seller of a practice rather than when an associate leaves, and in turn a covenant for an employee is likely to be less restrictive.
It is also worth noting that generally a court won’t interfere with the terms of a covenant if it is viewed as going too far. As an example, a restriction which applies to someone for a period of 10 years after leaving a practice will clearly be unenforceable. A court won’t see it as its place to decide what period would have been reasonable and to substitute such a restriction. It will most likely simply say that 10 years is too much, with the result that in practice there will be no restriction at all.
So what practical steps can I take to assist with enforcing covenants?
- First of all, think carefully about the specific circumstance you are trying to cover and what is reasonable. Don’t blindly copy terms from another practice – they may not work for you.
- Make sure that you actually set out the restrictions – we often see BDA template associate agreements where the detailed restrictions are blank – if there is no detail, then there is nothing to enforce.
- Finally, be prepared to enforce if someone does breach a covenant – apart from anything else, not doing so sends the wrong message to the rest of the practice.
Michael Royden is a corporate solicitor specialising in advising dental practices. We are always delighted to talk without obligation about whether we might meet your needs. Call Michael on 01382 229111.