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.

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.

Limits That Restrictive Covenants Place on a Property

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 businesses or home office on the premises.

Architectural guidelines set in restrictive covenants may limit any renovation plans for the property. The buyer of the property may be required to maintain the original appearance of the property. They might be required 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 for the neighborhood. Property owners could be barred from placing commercial signs or signs of any type on the premises. Flagpoles may be limited to a certain height on the property.

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 that 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 may be challenged in court.