Restrictive Covenant

A restrictive covenant is a clause, which can either restrict the freedom of an individual or entity in a business agreement or affect the usage of land, thereby setting specific limitations and obligations.
On this page

What is a Restrictive Covenant?

A restrictive covenant is a provision in a contract that restricts one of the parties involved either in an employment scenario or in the utilization of land:

  1. Employment Contracts: These covenants may include non-compete clauses that prevent an employee from engaging in business activities that compete with their employer for a specific period of time after their employment ends. While common, their enforceability can vary depending on jurisdiction and the specifics of the contract.

  2. Real Estate: In the context of land use, restrictive covenants are provisions that can limit the way the land can be used, sold, or developed. This can include restrictions on building designs, commercial use, or other alterations that could affect the neighborhood.

Examples

Employment Contracts

  • Non-Compete Clause: An employee working at a technology firm agrees not to join a competing company or start a similar tech business within a 50-mile radius for one year after leaving the current employer.
  • Non-Solicitation Agreement: An employee agrees not to solicit any clients or employees from their former company for a specified duration after leaving their job.

Real Estate

  • Land Use: A homeowner’s deed includes a covenant prohibiting the construction of any structure taller than two stories, ensuring uniformity in neighborhood aesthetics.
  • Commercial Restrictions: A company purchasing land in a residential area agrees to use the property only for residential purposes, not for operating a business.

Frequently Asked Questions (FAQs)

Q1: Are restrictive covenants enforceable?

  • The enforceability of restrictive covenants can depend on the jurisdiction, the specifics of the covenant, and whether it is deemed reasonable and necessary to protect legitimate business interests without being overly restrictive.

Q2: What determines whether a non-compete clause is reasonable?

  • Factors include the geographic scope, duration, and nature of the restricted activities. Courts often consider whether the restrictions are necessary to protect the employer’s business interests.

Q3: Can restrictive covenants in real estate be removed?

  • It may be possible to remove or modify restrictive covenants through legal procedures, negotiations with the parties benefitting from the covenant, or changes in property law.

Q4: Do all employment contracts include restrictive covenants?

  • No, not all employment contracts include restrictive covenants. They are typically used in roles where there is a significant concern about protecting proprietary information or retaining client relationships.

Q5: How can restrictive covenants impact property value?

  • Restrictive covenants can potentially increase property value by ensuring a certain standard or use but may also decrease value by imposing limitations on how the property can be used or developed.
  • Covenant: A formal agreement or promise within a contract.
  • Non-Compete Agreement: A type of restrictive covenant prohibiting competition within a specific area and timeframe.
  • Non-Solicitation Agreement: Restricts the solicitation of employees or clients from the former employer after leaving a job.
  • Easement: A legal right to use someone else’s land for a specific purpose.

Online References

Suggested Books for Further Studies

  1. Employment Law: A Guide to Hiring, Managing, and Firing for Employers and Employees by Lori B. Rassas
  2. The Law of Restrictive Covenants: Under the Common and Competition Law by Jasmine Lill
  3. Modern Real Estate Practice by Fillmore W. Galaty, Wellington J. Allaway, and Robert C. Kyle

Accounting Basics: “Restrictive Covenant” Fundamentals Quiz

Loading quiz…

Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!

Restructuring
Restriction