Restrictive Covenants: What Are They?

Jan 28, 2024 By Susan Kelly

Restrictive covenants are clauses that prohibit or restrict someone referenced in an enforceable agreement from acting in a particular way. Bond obligations with restrictive covenants limit the dividends that issuers may distribute to investors. Restrictive covenants are widely used in real estate deeds and leases to determine how owners and tenants can utilize a property.

Housing Exchanges

Contract clauses known as restrictive covenants forbid, limit, or otherwise govern the behavior of a particular person or entity. Restrictive covenants are typically included in real estate contracts and can address anything from the types of paint you can use on your house to the maximum number of renters that can use a space. Bond obligations with restrictive covenants attempt to lower the risk of default by limiting the number of investor dividends that issuers may pay. If broken, legally enforceable restrictive covenants can result in fines and even legal action.

Acceptance Of Restriction Covenants

As its name implies, restrictive covenants prohibit one of the parties to a contract from engaging in specific actions. Restrictive covenants, for instance, may limit the number of dividends publicly traded companies may pay their shareholders. Additionally, it might establish an executive wage cap. Violations of restrictive covenants can result in fines, other penalties, and possibly legal action.

Merger And Acquisition Agreements

The more negative covenants a bond issuance has, the lower the interest rate will be on the debt since investors perceive bonds with strict covenants as safer. Restrictive covenants are also present in Employment contracts (e.g., non-compete, non-disclosure, and non-solicitation agreements)

Real Estate Covenants Restricting Use

Restrictive covenants are frequently found in real estate. They impose restrictions on landowners and tenants and call for specific actions to maintain the value and enjoyment of the adjoining land. Restrictive covenants can be established through a deed or a declaration of restricted covenants, a separately recorded document. To preserve local property values, homeowner associations (HOAs) impose covenants, conditions, and restrictions (CC&Rs). Ordinarily, covenants are only regarded as legal if reasonable and beneficial to all of the community's property owners.

Historic Restrictive Housing Covenants

In the past, restrictive covenants have been used in real estate agreements to change the demographics of many American neighborhoods. The restrictions encouraged racial, ethnic, and cultural segregation by excluding particular groups from residing in specific communities.

Contrary To The Country's Constitution

In 1948, the U.S. Supreme Court delivered a landmark decision in Shelley v. Kraemer, ruling that racially restrictive covenants were unenforceable under the Fourteenth Amendment’s equal protection clause. This ruling came in response to a case that began when the Black Shelley family purchased a property in St. Louis in 1945 and attempted to move in. The neighboring white family, the Kramers, sought legal action to prevent the Shelleys from relocating, citing existing restrictive covenants in the property deeds that barred people of color from residing there. The Missouri Supreme Court initially supported the enforcement of these covenants. However, the U.S. Supreme Court's decision overturned this, marking a significant step toward ending legally sanctioned racial discrimination in housing.

Consumer Financial Protection

Discrimination in mortgage lending is strictly prohibited under federal law. If you believe you have been discriminated against based on your color, religion, sex, marital status, use of public assistance, national origin, disability, or age, you have the right to file a complaint. Such complaints can be directed to the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD), both of which are equipped to handle allegations of discrimination in housing practices.

Despite legal protections and rulings against discriminatory practices, it's important to note that racial restrictions in property deeds, known as restrictive covenants, are still found in the language of many property documents across nearly all states in the United States. While these covenants are no longer legally enforceable, the presence of such offensive language is a reminder of past discriminatory practices and underscores the ongoing need for vigilance and education in promoting equal housing opportunities.

What Is the Fair Housing Act?

The Fair Housing Act, a piece of federal legislation, protects people from discrimination when they rent or buy a home, get a mortgage, apply for housing assistance, or participate in other housing-related activities. The law prohibits discrimination in housing based on racial, ethnic, and national origin, as well as on religion, sex (including sexual harassment and gender identity), familial status, and disability.

By whom are restrictive covenants enforced?

The homeowners association (HOA) and specific lot owners may enforce covenants if you live in a planned community. On the other hand, laches, which can make violations unenforceable, is the loss of a right due to prolonged delay or an unwillingness to assert it. Let's use the example of erecting a fence to defy restrictive covenants. The HOA risks losing the right to enforce after waiting several years, which would let you keep your wall.

What Do Restrictive Covenants in Real Estate Mean?

A restrictive covenant in real estate requires owners and tenants to refrain from or carry out specific actions to preserve the value and pleasure of the neighboring land. For example, restrictive covenants may prevent tenants and owners from keeping dogs or parking R.V.s in the driveway. When ownership changes, it is claimed that covenants "run with the land."

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