What Are Restrictive Covenants? – Helix Law
The inclusion of restrictive covenants in commercial, employment, and property contracts or agreements is increasingly common.
As restrictive contract clauses are deployed more frequently, they’re also often a frequent source of disputes.
You may never have heard of a restrictive covenant.
But if you’re buying a home, signing an employment agreement, or taking on a company directorship, it’s essential to understand how they can limit or restrict freedoms and ability to act in ways that you may otherwise take for granted.
Learn more about restrictive covenants, how they can impact you, and how to use them to your advantage in this guide.
What Is a Restrictive Covenant?
A restrictive covenant is a clause in a contract, agreement, or other legal document that prevents an individual, group, or company from taking (or failing to take) a specific action.
Restrictive covenants are frequently included in commercial, employment, and property purchase contracts and agreements.
In property agreements, a restrictive covenant may bind not only the current purchaser but also future owners if the property is resold; this type of restrictive covenant is attached to the land and is not personal.
In real estate transactions, it’s essential to consider the negative impact a restrictive covenant may have on your ability to resell the property, even if the terms don’t trouble you.
For example, an inability to do certain things with land or property might limit the ability to extend or trade in a certain way, to develop or build on the land.
Restrictive covenants in property title deeds can date back decades and remain prohibitory to this day.
Why Are Restrictive Covenants Used?
Restrictive covenants in legal contracts are designed to protect and preserve the rights and wishes of individuals, groups, or organisations.
For example, a property owner who retains land adjacent to a sale plot may seek to impose restrictive covenants on a buyer to ensure continued peaceful enjoyment after the land is purchased.
Restrictive covenants in property agreements often prohibit anti-social uses or restrict specific types of development.
On housing estates, restrictive covenants are often deployed to preserve specific features of a home and help ensure uniformity in design throughout a community.
Other frequently used clauses prohibit residents from parking caravans or commercial vehicles on the premises or installing a satellite dish that’s seen as detrimental to the property’s appearance.
Employment contracts often contain restrictive covenants that limit specific actions and behaviours that can jeopardise an employer’s business.
Businesses frequently use non-compete clauses in an attempt to prevent former employees from working with their clients after they leave the company.
However, restrictive covenants that limit a former employee’s ability to find work are often unenforceable, particularly if they extend to 12 months or longer.
Restrictive covenants are also often seen in corporate contracts to protect sensitive interests and “trade secrets” should a key partner, employee, or director leave — especially if they’re going to a competitor.
Can Restrictive Covenants Be Changed or Removed?
You can mount a challenge to restrictive covenants related to land or property through the Land Registration Tribunal. The tribunal has the power to modify restrictive covenants or discharge them entirely if they’re obsolete or impede reasonable use of the property.
Employees can challenge restrictive covenants in their employment contract if the prohibited behaviour is unreasonably limiting or goes further than legally allowed in attempting to protect the employer’s interests.
A similar principle applies to restrictive covenants in all business agreements. The clause must be proportional and protect a legitimate commercial interest.
Types of Restrictive Covenants
Restrictive Covenants in Business
Restrictive covenants are frequently included in commercial contracts, particularly in the following types of agreements and contracts:
- Shareholder Agreements
- Partnership Agreements
- Director Service Agreements and Employment Contracts
- Contracts for the sale of a Company or Business (Sale and Purchase Agreements)
- Joint Venture Agreements
- Agency Agreements
- Distribution Agreements
- Supply and Purchase Agreements
- Franchise Agreements
- Employment Contracts
- Director Service Agreements
- Land or Property Purchase agreements
For restrictive covenants to be legally enforceable, they must be deemed reasonable by the court.
As a general rule, the more specific and reasonable a restrictive covenant, the more likely it is to be legally enforceable in a dispute.
The courts are generally very conscious of balancing the needs of a business to protect legitimate commercial interests and to protect investment on the one hand versus not allowing covenants which prevent or restrain trade and the ability to work on the other hand. This type of clause, therefore, needs to be very precisely drafted.
To avoid pitfalls and risk a court will later remove (or ‘oust’) a restrictive covenant, they should be explicitly drafted limiting their:
Taking the above approach greatly diminishes the risk that the courts will consider restrictive covenants unreasonably onerous in any dispute.
We are instructed to assist companies in drafting these clauses and complete this work.
However, we are contacted more frequently to assist companies and employees where there has been some dispute and there is a need to rely on a restrictive covenant.
Disputes can occur when an employee leaves a former employer and seeks to obtain an unlawful competitive advantage in breach of the covenants agreed with their previous employer.
Such disputes may lead to the need for a springboard injunction, referred to further below.
Types of Restrictive Covenants in Business Contracts
There are five primary types of restrictive covenants used in business contracts.
The specific language used for each varies based on the circumstances of the contract and the type of action or actions it seeks to limit or protect against.
Restrictive covenants must be reasonable and confined to protecting legitimate business interests and concerns. Otherwise, the Court is to find it unenforceable.
| Non-compete | A non-compete restrictive covenant prevents one party from competing with the other party to an agreement. |
| Non-disclosure | Non-disclosure restrictive covenants protect information, the intellectual property and confidential information of one (one-way), some, or all parties (two-way or mutual) to a contract. Examples of proprietary information frequently covered by non-disclosure covenants include non-patentable knowledge, customer lists, and personal information. |
| Non-solicitation | Non-solicitation restrictive covenants are used to protect the trade connections of a contracting party. A non-solicitation clause attempts to prevent a party or parties to a contract from using a personal connection formed while under the agreement to solicit customers or suppliers of the other party. For a non-solicitation covenant to be enforced, a direct attempt must be made to influence a customer or supplier to transfer their trade. |
| Non-poaching | Non-poaching restrictive covenants stop one party to a contract from hiring the other’s employees, consultants, or contractors for a limited period. |
| Non-dealing | Non-dealing restrictive covenants prohibit a contracting party’s employees, consultants, or contractors from doing business with its customers in a competing role. |
Employment Contracts
In employment contracts, restrictive covenants are most frequently used to prevent employees from directly competing with the employer’s business.
All five types of restrictive covenants are frequently deployed in employment contracts.
If you’re an employer, you may wish to prevent one of the following scenarios:
- An employee is terminated or leaves, then “steals” your customers;
- An employee goes to work for a competitor and divulges confidential information that can harm your business; or
- A former employee hires people away from your company to work for a competitor.
Restrictive covenants must be reasonable in scope and protect legitimate business interests for you to successfully litigate and enforce them through an injunction and claim for damages.
Property Disputes
Restrictive covenants are very common in property deeds and sales contracts.
Typically, a property seller uses restrictive covenants to limit the purchaser’s freedom to use the land or building in specific ways.
For example;
- Restricting a property for residential use only
- Preventing alterations (like building an extension or flat conversions)
- Prohibiting specific structures from being built on the property
Restrictive covenants are the best way for a property owner to retain some control of what happens to the land or building — even after it’s sold.
How Are Restrictive Covenants Enforced?
The Court’s position on restrictive covenants continues to evolve.
Non-compete, non-dealing, and non-solicitation clauses are increasingly seen as “unlawful restraint of trade”.
Consequently, post-termination restrictions are becoming harder to enforce.
Taking expert advice when drafting restrictive covenants — or when seeking to have enforce them — is essential should a dispute ever come to litigation. Otherwise there is a risk of losing leverage and/or bargaining position, or in seeking to enforce a weak or vulnerable clause, failing, and being ordered to pay the other side’s costs.
You have several options if you’re involved in a dispute and seek to enforce a restrictive covenant.
You can litigate for damages due to a breach of contract.
If time is of the essence, there is urgency, or the breach is ongoing, you can apply for an interim injunction.
An injunction is an urgent and immediate court order preventing a person or a company from committing a particular act or compelling them to take a specific and defined action.
Instructing an experienced solicitor when litigating damages or applying for an injunction based on the breach of a restrictive covenant is highly advisable.
Similarly, if you find yourself accused of breaching a restrictive covenant, you must take action immediately.
Otherwise, you may find your freedom to act in specific ways restricted by the court — and you may be found liable for damages.
How Do Restrictive Covenants Affect Homeowners?
Even if you own a property, restrictive covenants can impose strict limitations on what you can or cannot do with it.
Breaching a reasonable restrictive covenant can land you in seriously hot water.
Restrictive covenants preventing homeowners from altering a building, limiting additional construction on the property, and prohibiting commercial redevelopment are commonly upheld when challenged.
A third party entitled to enforce a restrictive covenant can seek a court order preventing you from persisting in your actions and/or claim monetary damages to reflect their loss. You could be left seriously out of pocket.
If restrictive covenants are present in a property agreement at the point of sale, your solicitor will likely recommend that you take out indemnity insurance to protect against breaches.
If the property has a mortgage, your lender may insist on indemnity insurance to protect their interests — and yours.
Frequently Asked Questions
What Is an Example of a Restrictive Covenant?
Common examples of restrictive covenants in the property sector are prohibitions against running a business from home or using it for commercial purposes. In employment contracts, non-compete or non-disclosure clauses are widespread.
Can You Sell a House With Restrictive Covenants?
Houses with restrictive covenants sell all the time. However, the restrictions may negatively impact the property’s value and appeal to buyers. It’s a common misconception that only old or period homes carry restrictive covenants. But they’re just as likely to appear in contracts for new housing estate builds and other residential developments.
Should You Buy a House With Restrictive Covenants?
Whether restrictive covenants should impact your decision to purchase a property depends on what actions are limited or forbidden. Even if you’re unbothered by the restrictions, certain types of restrictive covenants can negatively impact the resale value and diminish buyer interest. In some cases, restrictive covenants can be used as a lever in negotiations to lower the purchase price, as the property value may be negatively affected in the future.
Need Advice? Contact Helix Law.
Restrictive covenants are routinely included in contracts and agreements in a wide range of industries — particularly in property purchases and employment agreements.
Whether you’re considering signing a contract that contains restrictive covenants or you want to draft such clauses into an agreement to protect your interests, seeking expert legal advice is essential.
Helix Law’s expert commercial team is well-versed in advising on restrictive covenants and defending them if disputed.
Additionally, we have vast experience advising our clients on whether restrictive covenants are reasonable and the risks of any future impact.
If necessary, we can negotiate with the other parties to the agreement to have unduly restrictive covenants removed or re-drafted to be less limiting.
Helix Law acts for individuals and businesses. Our expert advice is always clear, pragmatic, and commercially astute.
Contact Helix Law today. We aim to respond to all queries within an hour.
