What Is a Restrictive Covenant?

A restrictive covenant is 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.

Key Takeaways

  • Restrictive covenants require a real estate buyer to either take or abstain from specific actions.
  • They can pertain to everything from what colors you can paint your house to what kind of roof you may put on it to how many tenants may live in a building.
  • Buyers who fail to meet restrictive covenants can incur penalties.
  • Sometimes restrictive covenants can be removed via payments to sellers, who must report such payments as capital gains income.

Understanding Restrictive Covenants

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 who can live in a property or even the timing of holiday decoration setup and removal. These covenants are particularly prevalent in planned communities with homeowner’s associations. Payments received for the release of restrictive covenants of investment properties are treated as capital gains.

Examples of Restrictive Covenants

Restrictive covenants on a property can govern how it is used by the occupants. For example, a restrictive covenant on a residential property might bar any business activities from being conducted on the property. This could preclude the occupant from running a home-based business or having a home office on the premises.

Architectural guidelines set in restrictive covenants may limit renovation plans for the property. The buyer of the property may be required to maintain its original appearance or to keep the property in a certain color scheme or style that is comparable to neighboring properties.

For example, a property in a certain area or neighborhood may be under restrictive covenants to adhere to a specific type of roofing and exterior color to maintain aesthetic consistency in the neighborhood. Property owners could be barred from placing commercial signs or signs of any type on the premises. Flagpoles on the property may be limited to a certain height.

Restrictive covenants were once used for racial discrimination, specifically forbidding the sale of properties to certain minorities, but that is no longer legal.

History of Restrictive Covenants

Restrictive covenants have been used in the past to affect the demographics of municipalities. Racial segregation in the United States was further enforced by restrictive covenants that barred properties from being sold to people of specific ethnicities. The practice was prevalent in the 1920s and least through the 1940s. This allowed communities to limit the access minorities had to housing in many cities across the country.

Some examples of racially restrictive covenants remain in some states, though they typically are no longer enforced. There may be cases where properties still list racially restrictive covenants to prevent minorities from purchasing the real estate and integrating the community. Such policies are no longer legal and should, if necessary, be challenged in court.