Restrictive covenants: Overview, definition and example
What are restrictive covenants?
Restrictive covenants are provisions in a contract or deed that place limits on the actions or behaviors of one party in order to protect the interests of another. These covenants are typically used to restrict certain activities that could potentially harm or undermine the value or interests of the other party. Restrictive covenants are common in real estate transactions, employment contracts, and business agreements.
For example, in a real estate agreement, a restrictive covenant might prohibit the new property owner from building a structure that blocks the view of neighboring properties. In employment contracts, a restrictive covenant might prevent an employee from working for a competitor for a specified period after leaving the company.
Why are restrictive covenants important?
Restrictive covenants are important because they help protect the legitimate business interests, property values, and rights of individuals or entities. They can prevent actions that could cause harm, such as competing businesses using proprietary information or tenants damaging property. These covenants are particularly important in protecting intellectual property, maintaining competitive advantages, and preserving the integrity of a property or business.
Including a restrictive covenant in contracts ensures that both parties are clear on the limitations or restrictions that will apply, providing legal protection and reducing the likelihood of disputes.
Understanding restrictive covenants through an example
A company hires an executive and includes a restrictive covenant in the contract that prevents the executive from joining a competing company within a 12-month period after leaving the company. This is designed to protect the company’s confidential information and prevent the executive from using it to benefit a competitor.
An example of a restrictive covenant clause
Here’s how a restrictive covenant clause might appear in a contract:
“The Employee agrees that, for a period of 12 months following the termination of their employment with the Company, they shall not directly or indirectly engage in or be associated with any business that competes with the Company within a [Insert Geographic Area]. The Employee further agrees not to solicit or attempt to solicit the Company’s clients or employees during this period.”
Conclusion
Restrictive covenants are important legal tools for protecting business interests, property rights, and confidentiality. By specifying limitations on certain actions, these covenants help prevent harm or unfair advantage in situations such as employment, real estate, or business relationships. A well-drafted restrictive covenant ensures both parties understand the scope of the restrictions and provides legal protection to maintain competitive and operational integrity.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.