How Deed Restrictions Can Affect an Investment Property

By: , Contributor

Published on: Mar 14, 2020

That old deed you skimmed over when reviewing the chain of title on a property may come back to haunt you if it included any deed restrictions.Find out what a deed restriction is and how to spot them before you find yourself with a property you can't use

When you purchase real estate, you can do what you want with it, right? Well, not if deed restrictions have been placed on the land. Deed restrictions can put a number of limits on what you can and can't do on your land, even things you never would have expected. To get the most use out of your land, you should know what deed restrictions are and how they can affect real estate.

What is a deed restriction?

A deed restriction is a recorded agreement that puts certain restrictions on a piece of land. These restrictions can involve what the land is used for or what's built on it. Deed restrictions "run with the land," meaning that they are tied to the deed and do not go away once a property is sold.

Anyone who buys real estate with a deed restriction will be legally bound to it. You may also hear people refer to deed restrictions as restrictive covenants.

Deed restrictions are usually put in place to protect the land values of properties in a residential neighborhood or to restrict certain businesses from moving into a commercial development.

A deed restriction is created during the transfer of real property. The seller grants a deed to the buyer but does so with certain restrictions. In this case, the seller is basically saying, "I will sell you this land as long as you agree to these restrictions." Those deed restrictions are then recorded with the register of deeds and are forever enforceable by law.

A deed restriction may be placed on a property due to environmental contamination. These deed restrictions usually prevent any residential use on the premises, drinking water wells, or any construction that would disturb the ground.

It is against the law to violate a deed restriction. If a property owner violates a deed restriction, the restriction can be enforced by a court order. The court order may require them to undo any violations, or pay a judgment.

Deed restrictions vs. zoning ordinances

Deed restrictions are different from local zoning ordinances. A local municipality puts zoning ordinances in place as part of the master plan for how they want the entire community laid out. A zoning ordinance can be placed on an entire neighborhood that may affect several properties, instead of just one single piece of land.

Creating or changing a zoning ordinance requires the vote of a local planning board, and the community is able to give their input. A property owner can request a change to the zoning ordinance if they can show that it will benefit the neighborhood or not affect the master plan.

On the other hand, a property owner can create a deed restriction without the approval or input of anyone else. Deed restrictions are usually created to protect a specific interest instead of impact the entire community, and they are usually only changed with the approval of whoever created the restriction.

While deed restrictions are normally created by the property owner, some government agencies can place deed restrictions on a property if a specific use or activity would negatively impact the community or neighboring properties.

How are deed restrictions used in residential developments?

Restrictive covenants are often seen in residential developments. A deed-restricted community has rules that each homeowner must follow regarding their land and how it's used. These restrictions are usually put in place at the time the land is being developed.

The deed restriction may not state-specific rules but require a homeowners association (HOA) to make the rules and change them when necessary. When purchasing land in a deed-restricted community, the buyer is agreeing to abide by these rules and that the rules may later change.

While some people may look at deed restrictions as a disadvantage, many owners see the benefit of keeping the standards of the neighborhood high. If you're buying a deed-restricted home, you may want to see how much property around you has the same restrictions.

How are deed restrictions used in commercial real estate?

Deed restrictions in commercial real estate are usually created to stop competitors from moving into the same development. The restrictions may be very broad, such as prohibiting any type of restaurant, or very specific, such as not allowing any businesses to sell ham sandwiches.

A developer may use deed restrictions to protect their tenants' interests. A tenant may also require certain deed restrictions before agreeing to sign a lease.

For example, a large restaurant chain is considering leasing space in a shopping center, and they don't want to compete with similar restaurants. As part of their lease negotiation, they require the developer to put deed restrictions on the shopping center, and the adjacent lots, to prevent competing restaurants from moving in.

While many leases offer noncompete clauses, a restrictive covenant agreement protects the tenants' interest even further.

In some instances, the person buying the commercial lot from the developer may require a deed restriction to be placed on the seller's own land to prevent a competitor from moving in next to the property they just bought. They may also want restrictions that won't allow businesses that may attract a customer base they don't want in the area.

Since commercial properties tend to change hands and uses over time, future developments may be limited due to old restrictions that are no longer relevant. This can potentially protect your investment by stopping unwanted developments -- or leave you out of some great opportunities.

What are some common deed restrictions?

Some common examples of deed restrictions include:

  • Design restrictions.
  • Building size restrictions.
  • Maintenance requirements.
  • Landscaping restrictions.
  • Parking restrictions.
  • Home-based business restrictions.
  • Fence-height restrictions.
  • Restrictions on types of businesses allowed.
  • Property use restrictions.
  • Restrictions related to environmental issues.

How can you search for deed restrictions before buying land?

Deed restrictions are recorded with the deed, so they can usually be found in a title search. Restrictive covenants don't have a time limit, so the title search will have to go as far back as possible. Title companies will check the chain of title before issuing title insurance on a property, and they can also provide a title search for a fee.

Most counties have recorded deeds and other documents indexed online so they can be searched easily. Online records only go back so far, so you may have to visit the register of deeds or county clerk's office to look at older records. Your real estate agent may also be able to point you in the right direction.

What should you watch out for in a deed restriction?

Some deed restrictions can be very vague and may end up restricting things that you weren't expecting. Steve Hayward, a commercial real estate developer with Hayward Land Development Resources, LLC, recalls a deed restriction that was a cause for a lot of debate.

"A Chinese restaurant chain required a restriction as part of their lease negotiation," Hayward explained. "The restriction prohibited any Asian restaurants. The problem later became agreeing on how to define an Asian restaurant because it was very vague and left to interpretation. Nobody was considering this when the restriction was put in place, but they now have a lot more limitations than what they expected."

It's wise to seek legal advice when dealing with deed restrictions to prevent problems like the one with the Asian restaurant. You may be fully aware of a restriction but not fully understand what all it may cover.

You should think about all the ways a deed restriction can affect a property, even if it doesn't seem like a big deal at the moment. Future expansions can be limited, and commercial space may be left vacant if you are limited in who you can lease space to.

Can a deed restriction be removed?

Removing a deed restriction can be very difficult. In order to remove a deed restriction, anyone that benefits from the restriction, or is affected by it, will have to agree to remove the deed restriction.

A deed restriction can also be removed by a court order in some rare circumstances. If the deed restriction is discriminatory or illegal in other ways, a court will order it to be removed. In some situations, a judge can also find a deed restriction to be unfair and have it removed. If the deed restriction is no longer relevant, the person who placed the restriction may also be willing to remove it.

The Department of Environmental Quality (DEQ) may agree to remove deed restrictions related to contamination if they determine the site has been properly cleaned. They may also agree to release certain restrictions at different stages of the cleanup process.

What is the history of restrictive covenants?

Restrictive covenants weren't always just about how houses looked in a subdivision or what types of businesses would be allowed to move into a property. In the past, restrictive covenants were a very common practice for segregation. Many deed restrictions prevented the owner of a property from selling it to certain minorities, mainly African Americans. This was used as a method to keep neighborhoods racially divided.

In 1947 a Supreme Court ruling started limiting how racial restrictive covenants could be enforced, and then the law was changed in 1968 to make racially restrictive covenants illegal under the Federal Fair Housing Act.

While racial restrictive covenants are no longer allowed to be written into a deed, they may still be found on some properties. Fortunately, these restrictions are not enforceable. Some states have passed laws that would require all racial restrictive covenants to be removed. This type of deed restriction can also be removed without any other landowners agreeing to it.

The bottom line

Deed restrictions can have a significant impact on a real estate investment, whether it's a residential rental property or commercial real estate. These deed restrictions can be a problem early on or may come back years later to cause an unexpected issue. Look closely at the chain of title when purchasing real estate, and have a clear understanding of how any deed restrictions will affect the use of the property.

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