Restrictive Covenant Agreement: A General Guide

A restrictive covenant agreement is a legal document that includes a promise to prevent a particular party from taking a specific action against other people. In other words, a person agrees to refrain from doing something when they enter into a restrictive covenant. The same person may also stop using a particular property in a certain way that is restricted by the same agreement. Although the contract may sound confusing, it is beneficial for both parties who sign it in the long run.

Note: To learn more about a restrictive covenant agreement, watch this video.

Key Takeaways

• Restrictive covenant agreements include clauses that prohibit, restrict, prevent, or limit the actions of an individual or entity.
• These agreements are common in various real estate transactions and employment sectors.
• Restrictive covenants aim to minimize any kind of default risk in bond obligations by limiting the amount paid in investor dividends.
• The agreements are enforceable, which means they can lead to fines and legal action if not followed.
• Restrictive covenant agreements were previously used to keep communities segregated racially. This particular practice is now illegal.

Types of Restrictive Covenant Agreements

Several restrictive covenant agreements are available for use between companies and their respective employees. The common types include:

• Non-compete Agreement: This particular agreement restricts one party from competing with another party directly for a specific period. This usually happens within a defined geographical location. The party that agrees not to compete also receives compensation in some way from the other party.
• Non-solicitation Agreement: This agreement restricts a former employee of the company from soliciting employees and customers after leaving the organization. Several businesses require their senior executives, such as accountants, managers, and CEOs, to sign a non-solicitation agreement.
• Non-disclosure Agreement: This legal contract is signed between an employer and an employee. This prevents the latter from disclosing any proprietary or confidential company information and business processes. The employee must also be properly compensated for signing the non-disclosure agreement in return.
• Anti-raiding or Non-poach Agreement: This particular restrictive covenant states that an employee must not ‘poach’ workers from the company once they leave it. These people must also not ‘raid’ the talent pool in favor of their new employers.
• Confidentiality Agreement: Employees often entrusted with company policies, customer accounts, secrets, and other mechanisms can be dangerous to an employer. This applies if that same employee ever works for someone else. A confidentiality agreement can help prevent former employees from disclosing confidential information about their former employer.
• Garden Leave Provision: These types of restrictive covenants are new but remain as enforceable as other agreements. A garden leave provision requires a particular employee to give notice of their intent to leave any company at a future date. Then, the employee will remain employed but perform few workplace duties for an agreed-upon period.

Enforcing a Restrictive Covenant Agreement

Certain requirements must be satisfied for a restrictive covenant agreement to be enforceable in the eyes of law. These include:

• The covenant must be either a restrictive or negative agreement.
• The covenant must be entered for the benefit of retained properties owned by the individual or entity that seeks to enforce it. This also involves mentioning the extent of that property that is ascertainable.
• The benefit and burden of the restrictive covenant agreement must have been intended to bind certain people within the contract.
• The restrictions imposed by the covenant must be reasonable. This specifically applies in terms of geographic scope, duration, and the scope of activities being restricted.
• The terms and conditions of the restrictive covenant must be clearly stated and unambiguous.
• The restrictive covenant must not violate public policy or infringe upon the individual's basic rights.

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Ways on How to Remove a Restrictive Covenant Agreement

It is a relatively straightforward process when it comes to removing a restrictive covenant agreement. However, it can be time-consuming and costly to remove the contract, which is why it is important to contact a lawyer to assist the parties with this process. The legal professional can also help everyone decide the best option for their circumstances.

Meanwhile, restrictive covenant agreements can be removed or varied in the following ways:

• Sending an Application to the Land Registry: Either party can make an application to the land registry to remove the restrictive covenant if the agreement is no longer enforceable.
• Doing Negotiations and Deed of Release: The parties could negotiate with the property owner who has the benefit of the restrictive covenant agreement if it is still enforceable. They may need to pay a sum of money to the property owner for them to agree to end the restrictive covenant in such cases. A Deed of Release must also be signed to release the same.
• Getting Indemnity Insurance: This strategy is best if the interested individual knows who the parties related to the restrictive covenant agreement are. They must also know exactly what property the restrictive covenant relates to, including its full extent. Otherwise, the parties may be unable to obtain any indemnity insurance. This acts as a mortgage lender's requirement to cover the risk of a restrictive covenant that is enforced on the property.
• Applying to the Lands Tribunal: Anyone can apply to the First Tier Tribunal (Property Chamber) to vary or release the restrictive covenant. This applies only if one of the below scenarios can be proved:
  • The restrictive covenant is outdated or not reasonable because of any changes to the property or the surrounding area.
  • Removing the restriction will not harm the beneficial property.
  • The property owners who benefit from the restrictive covenant know that people may be breaching the agreement and have made zero attempts to stop this breach.

Key Terms for Restrictive Covenant Agreements

• Consideration: A legal term that refers to the benefits associated with either party that they usually receive from a restrictive covenant agreement.
• Blue-penciling: The practice of narrowing, modifying, or deleting any unenforceable agreement or contractual provision so that the remainder of the same document is enforceable.
• Severability: A provision in a restrictive covenant contract that allows the remainder of the contract's terms to remain effective.
• Governing Law: A contractual provision that often determines which law shall apply in the event of a dispute in terms of the restrictive covenant agreement.
• Duration: Specifies the length of time that the restrictive covenant agreement will remain in effect after the individual's employment ends.
• Enforcement: A specific clause that usually outlines how the content of the restrictive covenant agreement can be enforced across various places.

Final Thoughts on Restrictive Covenant Agreements

A restrictive covenant agreement may save money in the long run by limiting the chances of any kind of litigation or legal complexities although it can be expensive. A former employee may branch off on their own, taking a company’s customers, training methods, or other talented workers with them without a restrictive covenant in place. It often forces certain organizations to consider legal action. Restrictive covenant agreements could prevent such instances from happening. In other words, they equally divide benefits among both parties. However, drafting the agreement may not be an easy procedure for either party. This calls for help from a professional lawyer who has worked on such cases earlier.

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