Restrictive covenants in real estate are exactly as onerous and potentially problematic as the term indicates. In short, they limit how owners and real estate investors can use the real property they're buying: how they can enjoy it, what business may be transacted on it, and sometimes even what changes they can make to the property or the structures on it.
A restrictive covenant exists as a clause in a deed, and while by some definitions it's a "promise," it's also legally binding and enforceable. Even 5, 10 or 20 years after the transaction, the "new" owner of the deed may be bound by the covenants. Covenants are not a form of local government control -- they're between private parties.
Your mind may be spinning out a few frustrated questions, like:
- Who has enough power to do this?
- Why would they do it?
- What gives them the right?
The answers change depending on the source of the restrictive covenant. Depending on the answer to each question, you may decide a certain piece of property isn't for you, no matter how great it looked at first. So let's go through each question and potential answer so you know how to evaluate.
Who has enough power to do this?
In most cases, it's the homeowners association of a development or planned community -- and they often wield that power with great enthusiasm. Restrictive covenants included in a HOA's covenants, conditions, and restrictions (CC&Rs) might cover:
- Whether and to what extent people can have home-based businesses.
- Property maintenance directives.
- Aesthetic guidelines.
- What's allowed on the property besides structures (e.g., no boats or trailer hitches).
- Lease restrictions.
Subdivisions without an HOA might still have restrictive covenants, which sometimes overlap with local zoning and may serve other purposes. They might cover:
- "Set back" requirements.
- Limitations on the type and number of buildings on a lot.
- Building height limitations.
Why would 'they' place restrictive covenants into a property deed?
Because someone with the power to do so wants tight control over one or more aspects of the property and/or the greater community.
In the best-case scenario, it would be specifically to preserve historic sites, green spaces, unique characteristics of a neighborhood, or some other positive attribute that improves residents' lives.
In many HOA-related scenarios, it's to enforce a level of aesthetic uniformity or routine expenditure thought to enhance the "quality of the neighborhood." When talking about a covenant that sets minimum expectation for roofing, exterior siding, and other safety-related aspects of homes, this makes sense. Even when limiting what sort of construction projects a homeowner can undertake, there's logic to having some sort of restrictive covenant.
However, when restrictive covenants start to dictate what shrubbery can be in the yard or what holiday decorations are allowed, tempers tend to flare, and people may eventually begin to bring up property rights as an argument against a particular covenant.
The ugly history of restrictive covenants
Historically in the United States, exclusionary "racially restrictive covenants" were used to keep people of different races/ethnicities from buying in certain neighborhoods. There are hundreds of thousands of them -- some of them blanket restrictions written into the CC&Rs for an entire planned community, and others that "run with the land" and stay on the deed to each house within a neighborhood or city. So, while the practice was supposed to have been overturned by the courts in 1948, restrictive covenants with language to this intent didn't stop being written into deeds until passage of the Fair Housing Act of 1968.
Like a dank and toxic layer of muck at the bottom of a pond, many exclusionary covenants still exist on chains of title. They are absolutely illegal, and not only cannot be enforced, but they should be either struck from the deed or overwritten with a document that invalidates the covenant but still allows people to dig deep and know it used to exist.
What gives anyone the right to have and enforce restrictive covenants?
The history of racially restrictive covenants shows how bad restrictive covenants can be when used with malicious intent toward certain groups. So why should any private entity have the right to them? Because the law allows it -- until it doesn't anymore.
Typically, the government lets private communities impose restrictive covenants because it raises property values and safeguards certain aspects of a neighborhood much more carefully than public resources could. But when covenants start to bump up against individuals' free use of the property they own, it may wind up in court, and courts -- especially in certain states -- favor the rights of property owners. Of course, there are areas where courts will usually side with the restrictions, e.g., limitations on being able to use private property for business purposes or limits on how many people can live in a single-family structure.
Should you walk away from a property that comes with restrictive covenants?
This depends on whether your priorities and intended usage align with them. There will always be people who appreciate and gravitate toward stricter communities because they want things "just so," and those who are more individualistic, entrepreneurial, or just less inclined to read and follow the rules.
As a general rule, unless you love a property enough to pursue a more difficult path to your intended usage (i.e., by paying extra fees to get an exemption), think twice about going through with a purchase if you discover restrictive covenants on the deed -- even at the eleventh hour.