Restrictive covenant

What is a Restrictive Covenant?

A restrictive covenant is a promise included in a legal agreement that prevents one party to the
contract from taking a specific action. When a party enters into a restrictive covenant, he/she
agrees to refrain from doing something or from using a property in a certain way that is
restricted by the contract.

For example, when purchasing real estate, the buyer may agree to use the property for the
designated purpose only and not for other purposes. If the agreement specifies that the property
can only be used for residential purposes, the buyer cannot then convert the property to
business use.

Types of Restrictive Covenants

The following are common types of restrictive covenants between companies and their
employees:

1. Non-compete agreement
A non-compete agreement restricts one party from competing directly with the other party for a
specific period of time or within a defined geographical location. The party that agrees not to
compete must be compensated in some way by the other party.

For example, an employer may require employees to sign a non-compete agreement that
prevents them from competing with their employer when they leave the company. Another
example of a non-compete agreement is when a business owner sells their business and they
agree not to set up any new company that would compete with the new owner. Such restrictions
usually expire after a specified period of time (e.g., two years, five years, etc.).

2. Non-solicitation agreement
A non-solicitation agreement restricts a former employee from soliciting employees and/or
customers from their former employer after leaving the company. Many businesses require
senior executives such as managers, accountants, and CEOs to sign a non-solicitation
agreement.

To be enforceable, the restrictive covenant must define reasonable limits, either according to a
period of time, geographical area, or type of work. In some states, such as California, there are
specific laws that make non-solicitation agreements unenforceable unless they are introduced to
protect trade secrets.

3. Non-disclosure agreement
A non-disclosure agreement is a legal contract between an employer and employee, which
prevents the latter from disclosing proprietary or confidential company information and
processes. In return, the employee must be properly compensated for signing the
non-disclosure agreement.

The agreement is active during the employee’s tenure and for a specific period after exiting the
company. For the contract to be enforceable, the agreement must be protecting valuable
information such as a trade secret or confidential information about the business.
Non-disclosure agreements are commonly used when a company contracts for the services of a
freelancer or other independent contractor. The freelancer has no inherent loyalty to the
company but may acquire valuable information about it in the course of working with company
employees.

Since business owners have invested a lot of money into developing the company, its
employees, and customers, restrictive covenants are designed to protect such investments.

#Restrictive Covenants in Real Estate

Restrictive covenants in real estate exist to prohibit the use of a property in a certain way by
tenants, homeowners, or other occupants. Such restrictions often exist in gated communities
and condominium developments. Many of the restrictions are often focused on preserving a
certain style, appearance, or functionality of the community.

Some of the restrictions that may be introduced include prohibiting owners from carrying out
business activities on the residential property, running a home-based business, or installing a
home office on the premises.

The restrictions on real estate may also be in the form of architectural guidelines. The developer
or seller of the property may limit renovation plans that would substantially alter the original
appearance of the property. For example, homeowners may be restricted from expanding a
garage or from increasing the total square footage of their home beyond a set maximum limit.
The intention is to maintain some uniformity in regard to things such as the basic color scheme
and appearance of properties in the neighborhood. Radical alterations might have a negative
effect on property values, thereby harming other homeowners in the community.

When one of the original homeowners sells their property, the restrictions are passed on to the
subsequent owners. Any violations of the property guidelines can result in lawsuits and fines.
Therefore, it’s important when you’re purchasing property in a development to make sure that
you are aware of whatever homeowner’s association or other restrictions exist.

#Limiting Restrictive Covenant Agreements

Whether restrictive covenants are enforceable or not, and to what extent, depends largely on
state laws (and therefore can vary widely from one state to another). Most states impose varying
rules on what specific types of clauses are allowed in restrictive covenant agreements.

For example, non-compete agreements are unenforceable in California, even if the employee
signed the contract voluntarily and was compensated for entering into the agreement. Courts
tend to favor placing the least possible restrictions on employees