Restrictive Covenant

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DEFINITION of 'Restrictive Covenant'

Any type of agreement that requires the buyer to either take or abstain from a specific action. In real estate transactions, restrictive covenants are binding legal obligations written into the deed of a property by the seller. These covenants can be either simple or complex and can levy penalties against buyers who fail to obey them.

BREAKING DOWN 'Restrictive Covenant'

Restrictive covenants can include such reasonable provisions as adequate maintenance of property and limitations pertaining to paint and decoration. They can also place more onerous restrictions on buyers, such as the number of tenants that can live in a property or even the timing of holiday decoration setup and removal.

Payments received for the release of restrictive covenants of investment properties are treated as capital gains.

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