VC GLOSSARY

Obligations within a contract or legal agreement that place restrictions on what any participating parties are allowed to do are called restrictive covenants. Restrictive covenants are used in a variety of legal agreements, especially in property deeds and employment contracts. 

These special clauses can be used to keep parties from misusing or otherwise abusing important assets, land, infrastructure, and more. The exact purpose of a restrictive covenant is defined by the type of contract or deed.

When restrictive covenants are included in property deeds, they typically limit ways in which the property can be used and developed. This is especially common in suburban developments. When land developers establish restrictive covenants, they typically do so in a declaration such as a "Conditions, Covenants and Restrictions" document.

So-called "deed restrictions" define what a new property owner cannot do to their property. These rules are presumed to be both understood and accepted at the time of signing. Restrictive covenants for land and developments do not disappear when a new owner makes a purchase. These special rules can actually last forever unless they are overturned by a unanimous vote involving all affected landowners.

Restrictive covenants are used in the financial sector to ensure bond issuers do not engage in unwanted behavior, including taking on additional debt or failing to prepare regular financial statements.

Bond issuing organizations that break the restrictive covenants in their bonds' documentation normally see their bond rating decline as punishment. This can complicate further bond issuance for them and degrade public perception of their businesses.

Restrictive covenants used in employment contracts often include compensation details for the party that agrees to avoid engaging in specified actions. Both employment and independent contractor contracts can leverage restrictive covenants to protect sensitive information, technology, or other important assets.

Restrictive covenants are clauses used in legal agreements that prohibit certain actions by one or both parties. A restrictive covenant is the opposite of a positive covenant, which is a clause that requires one or both parties of an agreement or contract to take specified actions.

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