What are the purposes of restrictive covenants in real estate transactions?

When drafting agreements, there are many nuances that must be taken into account. That is why there are so many different types of agreements that can be used in various types of real estate transactions. A restrictive covenant is one of the most basic and commonly used types. What it is and what its purpose is – we propose to learn further from this article.

Restrictive covenant – what is it?

A restrictive covenant or as it is also called a negative covenant is a type of contract whose purpose is to prohibit or limit the actions of a party to the transaction. In any real estate transaction, such restrictions are usually imposed by the seller and represent legal obligations of various kinds setting out any conditions for the use of the property.

The most common ones are fixed in the agreements:

  1. Obligations relating to interference with the architecture of the building. If such restrictions are mentioned in the agreement, you cannot make changes to the structure of the building or its structural parts without prior permission from the relevant authorities. In addition to basic prohibitions on architectural alterations, such restrictions may apply to more minor alterations to the exterior or interior design of the premises. For example, there may be bans on painting the walls of a house, the type of wall insulation, the installation of fences, and so on. 
  2. Lease restrictions. The contract may state that it is prohibited to rent out part or all of the building for both personal use and commercial purposes. This category of restrictions may also set out not only a ban but also specific conditions for renting out the property. On the one hand, it narrows your options to use the property, but on the other hand it can be an incentive to use it more efficiently and profitably.
  3. Restrictions on use. This is perhaps the most extensive group of restrictions on the use of the property that can be set out in an agreement. Such restrictions may include the prohibition of use (e.g. residential property may not be used for commercial purposes), or, on the other hand, the establishment of specific ways of using the property (e.g. residential property may only be used for personal use without the right to rent it out to third parties). It is advisable to study the agreements carefully before buying to make sure that there are no restrictions on the use of the property.

There are also what are known as positive obligations. Most commonly, this refers to the performance of certain actions related to the use of the property. The simplest example of a positive obligation is to pay the general expenses of the homeowners’ association.

Why are restrictive covenants necessary?

One may get the impression that restrictive covenants have a negative meaning for property owners. However, this is not always the case. If you are buying a property that is part of an owners association, such restrictions will ensure that all members have the same rights and responsibilities, help to maintain a consistent architectural look, and provide stability and help protect your rights as an owner. The most important thing is that when buying any property you carefully check and examine all the documents relating to that very property. You can do this with the help of top vdr providers, who will provide you with effective software that will assist you in the process of examining documentation and reviewing contracts.