Restraint of Trade and Warranties in a Childcare Sale

Two clauses in a childcare sale contract get skimmed at signing and argued about afterwards. The first reads close to this: the Vendor must not, for three years from Completion, within five kilometres of the Premises, be involved in any children’s education and care service. The second is a schedule of thirty or forty short statements the vendor promises are true — about the approvals, the enrolments, the staff, the books.

A restraint of trade clause stops the seller from rebuilding the business the buyer just paid for, and its enforceability turns on two variables — how far it reaches and how long it lasts — while the warranties do a different job: they move the risk that something is already wrong onto the seller, for a limited window and up to a limited amount. Neither clause makes the centre worth more. Both decide who wears the loss when something goes wrong.

What the restraint is actually protecting

When a buyer pays several million for a trading centre, most of that price is goodwill rather than fit-out — our guide to goodwill in childcare sales sets out what that number is made of.

The restraint exists because part of that goodwill is portable. A departing owner knows every family in the catchment, every educator on the payroll and every referral source in the corridor, and could open a centre 800 metres away and take a real share of the enrolments the buyer just paid for. That is the whole interest the clause protects — not the vendor’s general right to work, but the buyer’s ability to keep what it bought. Keep it separate from the point that trips people up: a buyer discounts goodwill that depends on the owner being in the building daily, but that is a pricing adjustment made before contracts, while the restraint protects what was still paid for afterwards.

Why a sale-of-business restraint of trade is treated differently

At common law a restraint of trade is presumed void, and becomes enforceable only if the party relying on it shows it is reasonable — an onus that sits with the buyer, not the vendor. Courts assess reasonableness across three dimensions: the activity restrained, the area and the duration. Where a business has been sold they apply that test more generously than to an employment restraint, on the reasoning that the buyer paid for the goodwill and is entitled to protect it. Reported decisions have upheld sale-of-business restraints of two, three and four years where the area matched the territory the business served.

In most jurisdictions a restraint found unreasonable is struck out rather than rewritten into something a court would have accepted. That is why contracts use cascading restraints: a ladder of alternatives (five years, then three, then one; 10 km, then 5 km, then 2 km) so a court can enforce the widest reasonable combination rather than discard the clause. New South Wales is the exception — section 4 of the Restraints of Trade Act 1976 (NSW) lets the Supreme Court read a restraint down instead of voiding it. The position varies by state, which is why drafting belongs with a commercial lawyer in your jurisdiction.

The Commonwealth’s announced 2027 crackdown on non-compete clauses, aimed at employees under the Fair Work high-income threshold, does not reach this clause: as consulted on, the reform carves out non-competes connected to a business sale. Franchise restraints are a third regime, tightened under the Franchising Code — see what a childcare franchise agreement includes.

How the radius and the term get set for a childcare centre

Childcare has a specific geography, and it should drive the numbers rather than a precedent borrowed from another industry. A centre’s catchment is not a circle. It is a commute. Families enrol near home, near work, or along the road between the two, so a restraint drawn tightly around the suburb can be close to worthless while one drawn along the arterial corridor is genuinely protective. Before either side agrees to a radius, pull the postcode spread of current enrolments out of the enrolment system. It is almost always wider and more directional than either party assumed.

On term, the buyer’s real exposure is the transition. Families and educators decide whether to stay under new ownership in the first eighteen months to two years; after that the relationships belong to the buyer. That is why two to three years is where most single-centre childcare sales settle, and why a vendor asked for five should ask what happens in year four.

Three carve-outs a vendor should insist on by name: centres they already own (a generic radius can capture a centre run for a decade); passive investment, since units in a listed trust holding childcare freeholds compete with nobody; and employment for an unrelated operator, for a vendor staying in early education as an employee rather than an owner.

The clause that bites harder than the restraint

For a childcare centre the non-solicitation clause usually matters more than the non-compete — and it gets a fraction of the attention.

Enrolments in childcare are held by the educators and the centre director far more than by the outgoing owner’s name over the door — consistent with what buyers already price, since stable staffing is what holds occupancy (staffing challenges and retention). So the risk that damages a buyer is not the vendor opening a centre. It is the vendor, eighteen months later, hiring the director and two room leaders — at which point the families follow the educators and no radius clause has been breached.

A workable clause names the two groups separately: staff employed at the centre at settlement (usually twelve to twenty-four months) and families enrolled at settlement. Sellers should push for the staff limb to exclude anyone responding to a general public advertisement — a fair and common line.

The warranties a childcare contract carries

Warranties are contractual statements of fact; if one is untrue at completion, the buyer has a damages claim. They cluster into four groups, and the childcare-specific ones sit in the first.

Regulatory. That provider and service approval are held and in good standing; that no condition, compliance notice, enforcement action or prosecution is on foot, threatened or undisclosed; that the current National Quality Standard rating is as stated; that no notifiable complaint or serious incident is outstanding. Approvals do not transfer automatically with the business (transferring the service approval), so this warranty carries real weight for a buyer whose whole investment depends on the approval surviving.

Financial and enrolment. That the accounts are accurate; that stated enrolments and occupancy are real; that Child Care Subsidy claims and remittances are correctly made with no undisclosed repayment obligation; that the fee debtor ledger is as disclosed. The buyer’s testing of that ledger sits in CCS remittances and fee debtors in due diligence — findings there become warranties here.

Employment. That employee records, qualifications, working-with-children clearances, award classifications and accrued entitlements are accurate. Not cosmetic: on a transfer of business prior service is generally recognised, accrued personal leave transfers with the employee, and a non-associated new employer has an election on annual leave — so the entitlements schedule moves the settlement adjustment. Long service leave rules differ by state.

Property and lease. That the lease is as disclosed, rent and outgoings current, no default outstanding, and consent to assignment not refused — the consent regime sits in lease assignment.

How warranty liability is actually limited

A vendor never gives warranties open-endedly, and the negotiation is about four things rather than the wording.

A cap and a basket. The cap is the maximum recoverable: in Australian private deals general warranties are commonly capped well below the purchase price, while fundamental warranties (title, capacity, authority) and tax warranties are typically capped at the full price. The basket is a floor — a minimum individual claim, plus an aggregate floor before any claim can be brought at all.

A survival period. General warranties usually run eighteen months to two years, long enough to cover a full financial year and one assessment cycle. Tax and fundamental warranties run far longer, tracking revenue-authority amendment periods, and intersect with the apportionment questions in GST, going concern and transaction taxes.

A disclosure carve-out. Anything fairly disclosed in the due diligence material or a disclosure letter is generally excluded from a claim — which is why the disclosure schedule is a vendor’s most valuable document, and why a buyer should never treat it as a formality.

And two things no limitation covers. Fraud and deliberate non-disclosure sit outside all of it. No cap, basket or survival period protects a vendor who concealed something.

What a restraint will not stop, and what a warranty will not recover

A restraint will not stop families leaving for reasons unconnected to the vendor — a fee rise, a staff departure, a new centre opened by someone else entirely. Supply in the catchment is a planning question, not a contract question. It will not stop former employees moving on; they are not parties to the contract. And enforcement means an injunction application: expensive, urgent and uncertain. Most restraints are honoured because breaching one is costly to defend, not because anyone expects to litigate.

A warranty will not recover a loss you cannot quantify, and it will not recover anything you were told about before signing — disclosure defeats it, the single most common reason a buyer’s claim fails. It will not reach a loss found after the survival period expires, and against a vendor with no remaining assets it is a piece of paper. A warranty is compensation for a problem you did not find; the due diligence checklist is how you avoid needing one.

Settle both clauses in the offer, not in the contract

These two clauses are almost always negotiated in the wrong order. They surface at contract drafting, weeks after price and terms are agreed, when neither party wants to reopen the deal — which is exactly when a vendor accepts a five-year restraint they will resent, and a buyer accepts a twelve-month survival period that expires before the first full year of accounts is signed off.

Put five items into the heads of agreement: the restraint radius, the restraint term, the non-solicitation limbs, the warranty cap and the survival period. Vendors should settle all five before going to market, alongside the rest of the pre-sale preparation work and inside the campaign’s usual confidentiality framework. Buyers should raise them with the first offer. They cost nothing to agree early and a great deal to argue about late.

Selling a childcare centre and unsure what you should be agreeing to? ChildcareLink advises on the commercial shape of these deals from first offer to settlement — start with our guide to selling a childcare centre, or contact us at childcarelink.com.au.

Sources

• Restraints of Trade Act 1976 (NSW), section 4 — NSW legislation / AustLII
• Australian commercial-law commentary on restraint of trade in business sale agreements — LegalVision, Sprintlaw, Armstrong Legal, JHK Legal, Rose Litigation Lawyers, 2025–2026
• Treasury consultation and law-firm analysis on the proposed 2027 non-compete reforms and the sale-of-business carve-out — Ministers’ Media Centre; Gilbert + Tobin; HFW; Barry Nilsson, 2025–2026
• Global Private M&A Guide, Australia — limitations on liability (caps, baskets, survival periods) — Baker McKenzie
• Australian warranty and indemnity commentary for private and SME transactions — Coulter Legal, Sierra Legal, DW Fox Tucker Lawyers
• Employee entitlements on a transfer of business — Fair Work Ombudsman
• Education and Care Services National Law and service approval transfer requirements — ACECQA; NSW childcare transaction commentary, Corestone Legal and Carneys Lawyers
• ChildcareLink transaction and advisory experience — catchment mapping, restraint carve-outs, and non-solicitation practice in Australian childcare sales

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. ChildcareLink recommends seeking independent professional advice tailored to your specific circumstances before making any business or investment decisions.