Restrictive Covenant – Definition

Cite this article as:"Restrictive Covenant – Definition," in The Business Professor, updated October 15, 2019, last accessed October 25, 2020, https://thebusinessprofessor.com/lesson/restrictive-covenant-definition/.

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Restrictive Covenant Definition

A restrictive covenant refers to a form of agreement that asks the buyer to either perform or refrain from doing a particular activity. In real estate industry, restrictive covenants tend to be binding legit obligations that a seller writes in the property’s deed. They can be either very easy to understand or complicated, and can make the buyer liable for heavy penalties, in case of any conflicts.

A Little More on What is a Restrictive Covenant

Restrictive covenants involve basic provisions including proper maintenance of property and restrictions associated with paint and remodelling. Also, there can be more limitations on buyers including the maximum number of tenants that can accommodate in the property, or the specific time period of decorating the home.

When restrictive covenants of investment estate are released, then it leads to receiving payments in the form of capital gains.

Limits that Restrictive Covenants Place on Property

Restrictive covenants can decide on how tenants should use the property. For instance, if there is a restrictive covenant associated with a residential property, then a person may not carry out any business activities there. Ultimately, this will avoid the tenant from operating any business from home.

There can also be limitations related to renovation and remodelling of a home in restrictive covenant. This information is usually offered in the architectural policies, and the property’s buyer may not be allowed to modify the initial look of the property. This can involve keeping the color tones of the home consistent. For instance, a home located in a specific area can be under restrictive covenants for following a particular kind of roofing and paint for establishing a consistency in aesthetics. The owner or buyer of property may not be allowed to put any kind of signs or boards thereon. Also, there can be a limitation on the heights of flagpoles placed on the property.

Earlier, restrictive covenants were used for affecting the municipalities’ demographics. Due to racial discrimination in the U.S., people of specific communities didn’t have access to properties. This was in practice between the 1920s and 1940s era in different provinces of the country.

There are some instances of racially restrictive covenants prevailing in some provinces, though they are not in enforcement anymore. Even today, many properties enlist racially restrictive covenants for avoiding minor communities from investing in the real estate sector. These laws or rules can be brought in front of the jury.

References for “Restrictive Covenant

https://www.thebalancesmb.com › … › Business Law & Taxes › Glossary

https://www.investopedia.com › Investing › Real Estate

https://economictimes.indiatimes.com › Definitions › Human Resource

https://legal-dictionary.thefreedictionary.com/restrictive+covenant

https://corporatefinanceinstitute.com › Resources › Knowledge › Deals & Transactions

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