Restrictive Covenant

Restrictive Covenant: Definition and Overview

A restrictive covenant is a clause in a contract that limits, prohibits, or requires certain actions by a party named in the agreement. These clauses are used across real estate, finance, and employment to protect value, manage risk, and preserve agreed standards of use or behavior. Violating a restrictive covenant can lead to fines, injunctions, or other legal remedies, though covenants that conflict with law or fundamental rights are unenforceable.

Types of Covenants

• Negative (restrictive) covenants: specify actions you cannot take (e.g., not running a business from a home, not paying dividends above a set amount).
• Positive (affirmative) covenants: specify actions you must take (e.g., maintaining landscaping, timely insurance payments).

Examples in practice:
– Real estate: limits on building size, paint colors, or types of animals allowed.
– Bonds/loans: limits on paying dividends, issuing additional debt, or pledging assets (negative pledge).
– Employment: non-compete, non-disclosure, and non-solicitation agreements.

How Restrictive Covenants Work

• In finance, covenants reduce creditor risk by restricting actions that would jeopardize repayment capacity (e.g., capping dividends or limiting new debt).
• In real estate, covenants are recorded in deeds or a declaration and “run with the land,” meaning they bind future owners unless legally removed or expired.
• Enforcement is typically by contract parties, homeowner associations (HOAs), lenders, or courts. Remedies may include damages, injunctions, or specific performance.
• Covenants become less enforceable if they violate statutes, public policy, or are applied arbitrarily. Delay in asserting rights (laches) can also bar enforcement.

Restrictive Covenants in Real Estate

Common topics covered by residential covenants (often called CC&Rs in planned communities):
– Setback lines and placement of structures
– Minimum home size and building dimensions
– Architectural materials, styles, and color restrictions
– Fence type and height; outbuildings and pools
– Landscaping and maintenance obligations
– Use restrictions (business, rentals, livestock)
– Signage, vehicle limits, and occupancy limits

HOAs and individual owners can enforce covenants, subject to reasonableness and legal limits.

Historical Use and Legal Limits

• Restrictive covenants were historically used to enforce racial and ethnic segregation in housing. Deed provisions excluding people of certain races or religions were common in the early to mid-20th century.
• In Shelley v. Kraemer (1948), the U.S. Supreme Court held that courts may not enforce racially restrictive covenants, effectively making them unenforceable under equal protection principles. Despite this, offensive language from old covenants can still appear on property records.
• The Fair Housing Act (Title VIII of the Civil Rights Act of 1968) prohibits housing discrimination based on race, color, national origin, religion, sex (including gender identity and sexual orientation), familial status, and disability. Discriminatory practices in housing and lending are illegal.

If you believe you have experienced housing discrimination, federal agencies such as the U.S. Department of Housing and Urban Development (HUD) accept complaints and can investigate.

Practical Considerations

• Read deed restrictions and HOA CC&Rs before buying property. Understand what is required and what is prohibited.
• In business or employment agreements, negotiate covenant scope, duration, and geographic limits to avoid overly broad restrictions.
• For lenders and investors, restrictive covenants are a tool to protect repayment, but overly strict covenants can limit borrower flexibility.

Key Takeaways

• A restrictive covenant is a contractual clause that limits or requires specific actions by the parties involved.
• They are widely used in real estate, finance, mergers & acquisitions, and employment agreements.
• In real estate, covenants can “run with the land” and bind future owners, but must comply with law and public policy.
• Racially restrictive covenants are unenforceable and illegal; discrimination in housing is prohibited under the Fair Housing Act.
• Understand, negotiate, and review covenants carefully before signing to avoid unintended obligations or conflicts.