Restrictive covenants are agreements that ensure that buyers take certain actions or abstain from certain actions. They are common in real estate transactions. They are legally binding obligations that clearly stipulated in the title deed by the seller’s property. They are usually complex and simple. Land developers apply them when subdividing property in residential developments. They involve restrictions on the nature of constructions in the areas so that it conforms to an overall plan of the area. For instance, they may restrict construction to residential single-family house or one storey houses. Another common restriction is setting a minimum size for dwellings in square feet. Buyers of land with restrictive covenants must honour those covenants. Failure to honour the covenants can result to legal actions by either the seller of other buyers in the adjustment properties. Usually, the court will compel the person to follow the order or vacate the property if they are not willing to abide by the covenant. The fact that the buyer signed the restrictive covenants means that they agreed to the terms. Therefore, it is a legally binding contract as long as it is not illegal.
Restrictive covenants matter to management because management becomes aware of what they can do or what they cannot do. As earlier indicated failure to comply with it can lead to legal action. Legal action may cost the company financial resources in terms of hiring an advocate, damages or any fines that may accrue. Similarly, there is unproductivity due to lost man-hours. Therefore, the firms ends up incurring unexpected costs that will lower the overall profitability of the company. Besides, non-compliance may adversely affect the reputation of the firm in question.
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Shim, J., & Siegel, J. (2008). Financial Management (New ed.). New York: Barron's Educational Series.