What is a Restrictive Covenant in Commercial Real Estate?
Restrictive covenants are restrictions placed on the use of a property. In commercial real estate, restrictive covenants may be placed on a property by a lender, restricting the activity of the owner while a loan is being repaid, or, by an owner, restricting the activity of tenants. In addition, restrictive covenants can also be written into a property's deed, either for a certain number of years or indefinitely.
For example, a lender may not permit certain, specific types of businesses from opening on a property (such as alcohol or tobacco stores). Alternatively, a landlord may have a restrictive covenant that prohibits businesses from being opened before or after certain hours (ex. 8am to 10pm).
More Examples of Restrictive Covenants in Commercial Real Estate
While business use and operating hour restrictions are some of the most popular kinds of restrictive covenants in commercial real estate, they're far from the only ones. In some cases, a lender may require a borrower to keep the property in good repair for the duration of the loan. Lenders may also mandate a specific occupancy requirement for the property for the loan's duration. If these restrictions are not met, a lender could potentially "call" the loan and demand immediate repayment.
Restrictive Covenants in Retail Leases
While most restrictive covenants are intended to protect lenders or property owners, some covenants are actually intended to protect tenants. For example, many retail leases have restrictive covenants designed to prevent tenants from over-competition from similar businesses. For example, if a grocery store signs a lease in a large shopping center, there may be a restrictive covenant in the lease preventing any other grocery stores from signing a lease in the same shopping center.