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 cover these topics,
- What are Restrictive Covenants?
- Deed Restrictions vs Restrictive Covenants
- Useful Examples
- What Property Investors Need to Know
- How Assets America® Can Help
- Frequently Asked Questions
What is a Restrictive Covenant?
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.
Uses for Planned Communities
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.
Uses for 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 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, deed restrictions, and CC&Rs are essentially the same concept, especially when used for HOAs and planned communities. RCs 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,” meaning that they apply to the property owner and the title transfer incorporates them. Documents beyond the deed can specify restrictions. For example, these include:
- Conveyance instruments
- Title commitments
- General warranty deeds
- Special warranty deeds
How to Amend RCs
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, however, 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 the community
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 sightline
- Repainting according to a set schedule
- Landscape your property according to HOA rules
What Commercial Investors Need to Know
1. Discouraging Potential Buyers
If you’re a commercial property investor, you must evaluate how much an HOA’s CC&R will discourage buyers. On the other hand, buyers must evaluate whether living in a planned community suits them.
Importantly, a buyer can sometimes remove restrictive covenants by paying the seller. Sellers must report such payments as capital gains. However, many HOAs do not permit any deviations from their RCs.
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.
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. Restrictive covenants should be literal and concrete to ensure their clear and swift enforcement.
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 a property if buyers fail to 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.
3. 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 and specific than zoning regulations.
How Assets America® Can Help
Assets America® is a loan broker for all types of commercial real estate transactions, providing financing from $5 million with virtually no upper limit. We also arrange loans for high-end jet aircraft and maritime vessels and super-yachts. For a complete list of our offerings, go to the Lines of Business on the menu bar or visit our homepage.
We have worked with restrictive covenants for decades. 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 the land” are perpetual. They remain attached to the land or property. Some RCs have an expiration date, but they 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 a 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.