Restrictive Covenant: Definition & Example

Instructor: Jessica Schubert

Jessica is a practicing attorney and has taught law and has a J.D. and LL.M.

By working through this lesson, you can gain an understanding of restrictive covenants. Furthermore, you will review related terminology as well as an example designed to increase your comprehension.

Definition

Imagine that you are going to buy a home. As part of the agreement to purchase the property, you have to agree to use the property as a residence only; you may not operate a business from the home. You agree to do so and purchase the property. The agreement you made to refrain from using the home as a business is an example of a restrictive covenant.

Generally, a covenant is a promise that one party makes to another in a contract. In real estate contracts, restrictive covenants are frequently utilized. These covenants typically 'run with the land,' which means that the promises go on and on, no matter who buys and owns the land in the future. Whenever the property is sold, the restrictive covenant goes with it. Thus, in the example above, if you were to sell the home in the future, the next buyer would have to agree not to use the property for business purposes.

The restrictive component of the covenant means that the party agrees to either refrain from performing an act on the property or using the property in a certain way. For instance, there can be a restrictive covenant that prohibits the use of the property for rental use or for retail use. In the above example, the restriction exists in the prohibition of business use at the property. In addition, restrictive covenants can prohibit or limit such items as the color of paint one can use, the use of antennas, and holiday decorations.

Restrictive covenants are sometimes called 'deed restrictions'. A deed restriction simply means that the restrictive covenants are included in the deed of ownership and run with the land for future purchasers.

Restrictive covenants can also be found in non-real estate matters, such as in employment contracts. In employment contracts, restrictive covenants are also known as non-compete clauses. A non-compete clause is a provision that states that an employee cannot seek similar employment if the employee leaves for employment with another entity. The scope can be limited in time and place.

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