Understanding Restrictive Covenants in Commercial Real Estate
Rosie Korcz
05/09/2019

In the complex and often costly world of property development there are various potential restrictions on the progression of a property developer’s best laid plans. Restrictive covenants can rank right up there in terms of both costs and navigation with potentially severe consequences of breaches. Understanding restrictive covenants and how to tackle them is vital right from the start of any new commercial property venture. 

What is a Restrictive Covenant? 

A restrictive covenant is a control imposed on the use or development of a certain piece of land. They can date from decades and even hundreds of years ago and are meant to ensure the continued enjoyment of the neighbouring land. In modern times restrictive covenants have morphed into a many faceted tool for the crafty, and a barb for the unwary. 

As indicated by the word “restrictive”, restrictive covenants have a negative rather than a positive implication. They will state what cannot be done rather than what a land owner should do. 

For commercial real estate, restrictive covenants can be implemented in many ways. They can restrict the activity of tenants by the landlord or a lender can use a covenant to restrict activity on the property while the owner owes money. These covenants can be written into a property deed, either for a set amount of years or on an indefinite basis. 

Restrictive covenants can also operate in ways that you might not expect. They can restrict opening times, stop certain types of business from operating on the land (prohibitions on selling alcohol, for example), or prevent parking of commercial vehicles on the property. All of which can be potentially damaging for the smooth running of a business, not to mention the possible implications of preventing healthy commercial competition.  

Challenging Restrictive Covenants – is it worth it? 

There are a few options available to those wishing to challenge a restrictive covenant.  Challenges may be based on the premise that the restrictive covenants are not valid, that they are not enforceable or that they are contrary to the law or updated legal policies. For example, restrictive covenants against competing businesses opening in nearby premises may fall foul of competition laws.

A variation of the covenant could be negotiated by an express release between the parties. Alternatively, the subjected party may apply to the Upper Tribunal for modification or removal of a restrictive covenant, though this can take much longer and be much more expensive to resolve. 

Another option for those with less time, and shallower pockets, is obtaining indemnity insurance for the intended breach. Policies can be obtained for a one off fee and can provide cover for landowners, lenders and tenants under one policy. A key point to note here is the cost saving property developers will make if they obtain their insurance prior to the commencement of any planning application. Once planning has been granted the cost of a policy is invariably much higher than a pre-planning policy would have been. 

For more information about restrictive covenants and its impact on your commercial real estate, get in touch with the Pannone Corporate team. Either call on 0800 131 3355 or by filling out the contact form.

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