Restrictive Covenants – Everything You Need to Know

The world of real estate depends on contract law to operate rationally and efficiently. This article is about restrictive covenants (RCs), which you’ll find in many real estate contracts. We’ll start exploring what are restrictive covenants by providing a restrictive covenants definition. Next, we’ll contrast deed restrictions vs restrictive covenants and provide some restrictive covenants examples. Then, we’ll discuss what commercial property investors need to know about restrictive covenants in real estate. Finally, we’ll describe how Assets America® can help and answer some frequently asked questions.

What is a Restrictive Covenant?

Restrictive Covenants Definition

A general restrictive covenants definition is a contractual agreement that mandates buyers to take or avoid specific actions. Restrictive covenants in real estate bind the buyer through specific language within the property deed. Whether simple or complex, restrictive covenants can carry penalties when buyers ignore them.

You’ll find RCs liberally utilized by homeowner associations (HOAs) in planned communities. Buyers must become members of these HOAs and pay fees for its operation. Typically, HOA members must adhere to covenants, conditions, and restrictions (CC&R).

According to one study from 2017, 20% of American home dwellers belong to an HOA. Experts expect the number to continue surging in 2020 and beyond. RCs control different types of “common-interest communities,” including HOAs, condominium communities and housing cooperatives.

The Community Associations Institute (CAI) estimates that these associations control more than $5 trillion in home values and commandeer homeowner dues each year of $85 billion.

Video:  What is a Restrictive Covenant?

Commercial Properties

Restrictive covenants also apply to commercial leases. They protect the landlord from a variety of contingencies. For example, a shopping mall owner may include a lease RC. The RC might prohibit a tenant from opening another store within a certain radius outside the mall. Landlords must be aware of limitations against “unreasonable” restraints of trade under the Sherman Antitrust Act. This comes down to a matter of law that courts must interpret on a case-by-case basis.

A commercial RC might prevent certain types of businesses from operating in a leased property. Examples might include the sale of alcohol, marijuana, or tobacco. A mall might prevent or limit the number of stores that directly compete with each other.

Deed Restrictions vs Restrictive Covenants

Restrictive covenants can appear within the deed itself or in a separate document. You can find them in the Declaration of Covenants Conditions and Restrictions. They “run with the land,” i.e., they apply to the property owner and the title transfer incorporates them. Documents beyond the deed can specify restrictions, including:

  • Conveyance instruments
  • Title commitments
  • General warranty deeds
  • Special warranty deeds

In some cases, the document specifying the RCs will also specify mechanisms for modifying them. For non-planned communities, the buyer might be able to purchase an easement from specific RCs. For planned communities, a set percentage of HOA members might be able to vote to modify RCs. Lacking a modification mechanism, the HOA might require a unanimous vote.

RCs usually run for a set time period and automatically renew unless there’s a vote to the contrary.

Examples of Restrictive Covenants

Only the imagination of sellers limits the variety of restrictive covenants examples that contracts might contain. They can be mundane, such as controlling the exterior paint colors a homeowner may use. Another example might require homeowners to maintain their properties adequately.

Here are some more examples of restrictive covenants:

  • The dates that holiday decorations can go up and come down.
  • Limitations on how homeowners can renovate their properties.
  • The maximum height for flagpoles.
  • The maximum number of tenants who may occupy a property.
  • Banning any signs on properties in the community.
  • A prohibition against parking a recreational vehicle in your driveway.
  • How tall grass can grow.
  • How many flower beds you can install.
  • Prohibitions against curtains or Venetian blinds.
  • Whether homeowners can keep pets.
  • Where homeowners may place trash cans.
  • Prohibitions from raising livestock or cash crops.
  • Fencing regulations.
  • Minimum setback lines.
  • Prohibitions against structures such as satellite dishes or swimming pools.
  • Barring business activities within in the community.

Affirmative Obligations

As opposed to a restriction, an affirmative obligation requires you to take some action. The primary obligation is to pay your HOA dues and assessments. You may also have to:

  • Maintain the physical appearance of your property.
  • Maintain the property’s minimum size.
  • Prepare trash for collection.
  • Remove trees that have grown too tall.
  • Preserve a neighboring property’s sight line.
  • Repainting according to a set schedule.
  • Landscape your property according to HOA rules.

What You Need to Know

The first thing you must know about RCs is that a buyer might remove them by paying the seller. Sellers must report such payments as capital gains. However, many HOAs do not permit any deviations from their RCs.

Accordingly, if you’re a commercial property investor, you must evaluate whether an HOA’s CC&R will overly discourage buyers. Buyers must first evaluate whether living in a planned community suits them. Some people enjoy the iron hand of the HOA to help maintain property values. Others chafe under the HOA’s dictatorial powers routinely lorded over its members. RCs might discourage buyers who don’t value shared amenities, are intolerant of regulations and rules, or simply don’t trust self-government. HOA volunteer enforcers might create tension among the homeowners in a planned community.

Enforcement

To be enforceable, RCs should be definite, clear, reasonable, and not contrary to public policy. It’s up to courts to resolve any ambiguities, usually in favor of free use of land. Therefore, RCs should not be subjective or ambiguous. Rather, they should be objective, literal, and concrete. HOA’s can’t engage in selective enforcement practices or adding restrictions after the fact.

Some communities have restrictive covenants but no HOA. In that case, individual neighbors may take you to court if you run afoul of the RCs. However, most planned communities have an HOA or similar body that can sue you for non-compliance. The HOA may seek financial penalties and damages from homeowners who fail to observe all CC&Rs. State laws may limit fines. Ultimately, an HOA can foreclose on your property if you fail you follow the rules. The HOA may collect damages without showing injury, since the breach is sufficient ground for damages.

Enforcement comforts potential investors because it gives teeth to the community RCs. This helps to ensure that property owners will maintain the appearance of the community and thus protect property values.

Due Diligence

Investors and buyers should perform due diligence before agreeing to restrictive covenants. You should demand a detailed list of requirements and restrictions well before you close on the property. If you can’t accept them, you should resign yourself to looking elsewhere. Alternatively, you can become a board member and work to change the CC&Rs.

In cases where the property is not part of a planned community, you can check the title commitment for RCs. You should do this before you agree to buy title insurance. If you’ve decided against title insurance (typically a very bad idea), you can inspect the property deed at the local county recorder’s office. The deed will list any RCs on its face. Other sources of information include the general subdivision plan and separate documents filed with the plat. Give yourself time to consider RCs, since it might take time for you to decide.

Do not confuse RCs with zoning ordinances. Both may limit, say, the height of buildings, but zoning ordinances carry more clout. Generally, RCs can be more intrusive than zoning regulations.

How Assets America® Can Help

Assets America® is a loan broker for all types of commercial real estate transactions. We also arrange loans for high-end jet aircraft and maritime vessels and super-yachts (see our Lines of Business on our homepage). Our minimum loans start at $10 million with virtually no upper limit. We have worked with restrictive covenants for decades and may possible be able to suggest some legal resources from which you may wish to seek additional information. Please contact us right away before investing in properties that come with RCs.

Frequently Asked Questions

How long do restrictive covenants last?

Restrictive covenants that run with land are perpetual. They remain attached to the land or property. Some RCs have an expiration date, but automatically renew unless voted down. Some developers specify a sunset period, such as 10 years, after which RCs expire.

What is a declaration of restrictive covenants?

A declaration of restrictive covenants is a legal document or clause in a lease or deed for real property. It specifies RCs that apply to the property a buyer or lessee is considering. The declaration of restrictive covenants enables enforcement in a court of law.

What was the Supreme Court’s ruling in 1948 regarding restrictive covenants?

Shelley v Kraemer struck down RCs that discriminated on the basis of race. A black couple in St. Louis sued against an RC that prevented home purchases by “Negro or Mongolian” people. The court ruled that this RC was unconstitutional and counter to the 14th Amendment.

How can you amend a restrictive covenant?

You might be able to amend an RC by paying money to the seller. If an HOA administers the property, it might take a vote by some or all of the HOA members. You can also sue in court and ask the judge to nullify an RC.

How can you find restrictive covenants on property?

There are several places you can look, including the deed or lease. Also, you might find RCs in conveyance instruments, title commitments, plats, general warranty deeds, and special warranty deeds.

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