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Restrictive Covenant Advice & Disputes
Restrictive covenants are a crucial aspect of property and employment law within the United Kingdom, yet they often create confusion and disputes among those affected by them. Whether you are purchasing a new property, looking to sell, or entering into a new employment contract, understanding the nuances of restrictive covenants is essential to protect your interests. In this comprehensive guide, we will delve into the various types of restrictive covenants, their enforceability, and how to resolve disputes should they arise. This article seeks to offer detailed guidance and practical tips for navigating the often complex landscape associated with restrictive covenants.
What Are Restrictive Covenants?
Restrictive covenants are legal obligations imposed in a deed or contract that restrict someone from undertaking certain actions or using land or property in specific ways. They are commonly found in property deeds and employment contracts, serving to protect the value or integrity of land or to maintain fair competition in business. In property contexts, these covenants are designed to maintain certain standards within neighbourhoods or developments, while in employment contexts, they keep sensitive information and business interests safe once employees leave their positions. Understanding the type and purpose of a restrictive covenant is the first step in seeking advice or contesting such restrictions.
Restrictive Covenants in Property Law
Within residential and commercial property law, restrictive covenants are generally agreements that affect the use of land. Typical examples include prohibiting building extensions, limiting business activities in residential areas, restrictions on pet ownership, or preventing certain alterations to the appearance of homes. These covenants ‘run with the land’, meaning they can remain enforceable even as ownership changes hands. Such restrictions are entered onto the title register, and it is imperative for prospective buyers to examine these thoroughly before completing a purchase.
The origin of most restrictive covenants in property dates back to when the land was first sold or divided. Previous landowners (often developers) attach these restrictions to maintain a desired standard or style within an estate. For instance, a development may have covenants preventing residents from putting up satellite dishes or using properties for non-residential purposes. While these may sound minor, they can have significant financial and practical implications. Homebuyers must be aware of any restrictive covenants that could affect their intended use of the property, planned renovations, or future development potential.
Types of Restrictive Covenants Found in Property Deeds
- Building Restrictions: Preventing additional structures, limiting the size or style of new builds or extensions.
- Usage Restrictions: Prohibiting certain uses such as business, agriculture, or short-term rentals.
- Behavioural Restrictions: Forbidding specific activities, such as keeping livestock or running a business from home.
- Aesthetic Restrictions: Imposing rules about paint colours, fencing styles, or garden maintenance to preserve the visual harmony of a development.
- Environmental Covenants: Preventing the removal of trees and hedgerows or prohibiting certain chemicals from being used in gardens.
Violation of such restrictions can result in enforcement action, damages, or injunctions, and can complicate or even derail sales processes if discovered late.
Restrictive Covenants in Employment Contracts
In the world of employment, restrictive covenants serve to protect an employer’s legitimate business interests. They typically prevent former employees from using sensitive knowledge after leaving the company. Common examples include non-compete clauses, non-solicitation agreements, and confidentiality agreements.
A non-compete clause restricts an employee from working for competing businesses within a specified geographical area and timeframe post-employment. Non-solicitation covenants bar former employees from poaching former colleagues or clients. Confidentiality clauses prevent the disclosure or misuse of sensitive information. Given the sensitive nature of these matters, businesses must balance between protecting their interests and not unduly restricting an employee’s right to work or move on.
For a restrictive covenant within an employment contract to be enforceable, it must protect legitimate business interests, be reasonable in scope, duration, and geography, and not be against public policy.
Enforceability of Restrictive Covenants
Enforceability is a central issue in both property and employment restrictive covenants. Not all covenants are equally binding. Courts apply a strict test to ensure that such restrictions are justified and reasonable, both in terms of what is restricted and for how long.
For property covenants, the court will look at whether the intended covenant is properly registered and whether it ‘touches and concerns’ the land. If the restriction is deemed outdated or not in the public interest, it may be deemed unenforceable.
In employment, the courts weigh the interests of the business against the employee’s right to earn a living. Overly broad or vague restrictions are unlikely to be upheld. A reasonable and specific scope—such as a six-month restriction within a defined geographic area—is more likely to pass scrutiny than a blanket prohibition lasting several years across the whole country.
Identifying Restrictive Covenants Before Entering a Contract
One of the most important steps when entering into a property or employment contract is to identify any restrictive covenants before signing. For property purchases, scrutinise the title register and property deeds. Lenders will also check for restrictive covenants when assessing mortgage applications, as certain restrictions may affect the property’s value or marketability.
In employment, carefully review the post-termination sections of your contract. Seek advice if you are uncertain about the implications of certain clauses. Employers should ensure that restrictive covenants are tailored to the role and responsibilities of the employee to maximise their enforceability and avoid including unnecessary or excessive limitations.
Varying or Removing Restrictive Covenants
There may be occasions where a restrictive covenant is no longer relevant, practical, or enforceable. In property matters, changing a restrictive covenant often requires agreement from all parties with the benefit of the covenant. Where this is not possible, an application can be made to the Upper Tribunal (Lands Chamber) to have the covenant modified or removed under section 84 of the Law of Property Act 1925. This process requires demonstrating that the covenant is obsolete, impedes reasonable use of the land, or does not confer practical benefits to anyone.
In employment, new post-termination covenants can sometimes be negotiated, usually as part of a wider contract renegotiation or settlement agreement. However, any changes must be agreed by both employer and employee. Outdated, ambiguous, or excessively broad covenants can be challenged and potentially struck out by an employment tribunal or the courts.
Common Restrictive Covenant Disputes
Disputes around restrictive covenants are not uncommon and often arise when one party seeks to exercise a liberty believed to be restricted by a covenant, or where a covenant is felt to be unfair or overly restrictive. In property, disputes may arise if a neighbour attempts to build an extension or operate a business at home against the terms of a covenant. Employment disputes typically occur when a former employee joins a competitor or approaches former clients, leading to claims of breach.
Resolving a dispute in its early stages is key to avoiding costly and protracted litigation. The first step is to clarify whether the covenant is actually enforceable, followed by attempts at negotiation or alternative dispute resolution mechanisms, such as mediation.
How to Handle Restrictive Covenant Disputes in Property
If you suspect that a restrictive covenant is being, or is about to be, breached, the immediate step is to notify the party in breach of the existence of the covenant and request compliance. In some cases, the issue may stem from a simple misunderstanding.
Should informal measures fail, it may be necessary to take formal action. This might include seeking an injunction to prevent or halt works or operations in breach of the covenant, or pursuing compensation. However, a claim must be brought within the time limit for legal remedies, and you must demonstrate that you have the benefit of the covenant and have suffered loss or damage as a result of its breach.
Conversely, if you are facing enforcement action for an alleged breach, review the wording and context of the restriction and gather evidence showing the covenant is no longer relevant or enforceable. Engage in dialogue with the covenantee (person with the benefit) and consider proposing formal modifications or removal through legal mechanisms if necessary.
How to Handle Restrictive Covenant Disputes in Employment
For employees facing accusations of breaching restrictive covenants, it is critical to review the exact contractual wording, how any actions relate to those restrictions, and whether the restrictions are enforceable. Often, challenges can be made if the covenant is too broad or unenforceable at law.
For employers, the focus should be on protecting legitimate business interests. This involves ensuring that restrictive covenants have been drafted reasonably, are known to departing employees, and are not more restrictive than necessary. If a breach is suspected, gathering evidence—such as client lists, email records, or marketing materials—will be essential in substantiating any claim. If an initial warning does not secure compliance, you may consider seeking an injunction or damages through the courts.
In either scenario, open communication and attempts at negotiated settlement can often lead