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The issue of restrictive covenants in commercial real estate

A covenant on a property refers to restrictions on its use or obligations tied to the purchase of land. This can determine how a property is used and affect its price.

restrictive covenants in commercial real estate

Per legal firm Ward and Smith, P.A., restrictions on properties can cover a large set of circumstances: properties can be restricted for certain uses, architectural reviews for new constructions or modifications may be required, and leasing restrictions may affect a variety of issues that could be detrimental to certain tenants.

Business use and operating hour restrictions are the most common types of restrictive covenants in commercial real estate, says, and can be mandated by lenders in order to protect investments. Covenants affecting retail leases can also be geared towards tenants.

While most restrictive covenants are intended to protect lenders or property owners, some covenants are actually intended to protect tenants. 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.

Not all restrictive covenants are enforceable, and they can be challenged in court. Per Carlson Dash, covenants are often enforceable only by the person for whom the benefit was intended, meaning former owners are no longer entitled to enforcement. An article by the firm’s Wendy M. Reutebuch states there are grounds to have covenants removed by the courts.

  • Obtaining a written release or modification of the covenant from the party or parties who are entitled to enforce it. However, in many cases, the grantor of the release does not have the power to release the grantee from the effect of covenants which were granted earlier in the chain of title (e.g., owner B cannot release grantee C from a restrictive covenant that was created by prior owner A before B took title to the property).

  • Merging the benefitted land and the bound land. If title to two adjacent lots is merged in a common owner, the benefit and the burden vest in the same owner, which generally extinguishes the restrictive covenant.

  • Providing evidence (in court) that violations of the covenant were allowed and tolerated by the party entitled to the benefit, where that party is now seeking to enforce the covenant against a new owner/violator (the “you did not enforce it before, so you should not be able to now”).

  • Proving (in court) conduct by owners of benefitted land which shows an intent to relinquish the covenant, such as where a benefitting owner seeks to enforce a building line against an adjacent owner, but the benefitting owner has violated the restriction they seek to enforce against their neighbor (the “you violated it, so you cannot now enforce it”).

The prospect of restrictions on land means purchasers must be undertaking due diligence to ensure complicity. Restrictive covenants are just part of the due diligence process on a long list of items to consider before purchasing a property.

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