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Beware Restrictive Covenants Affecting Commercial Real Estate and Leases

Imagine you are searching for a good parcel of land on which to build a site for your commercial business, or perhaps you are seeking an existing space to buy or lease. You find a property in an upscale area that is thriving and well-trafficked; even better, you can secure the property for a bit below current market pricing in the immediate vicinity. The property’s previous use was light industrial, and the land is zoned for commercial or light industrial use. It sounds like a bargain that is almost too good to be true—and it just might be, if the land is subject to a restrictive covenant.

Restrictive covenants can have a substantial impact on the use and value of a property; for that reason, any potential owner or tenant needs to be beware restrictive covenants affecting commercial real estate and leases. In Texas real estate, restrictive covenants are contractual promises that govern how a specific property can be used. The covenant will place limits on the nature and purpose of any use of the property. For example, a land deed could specify that the parcel of land is to be used for residential purposes only, and prevent any subsurface structures from being built upon the land. A variety of other potential restrictions could be placed on the property which might limit or completely preclude the normal operation of your business.

Even when a property is zoned permissively and other laws or regulations allow for a particular type of business to be operated on site, restrictive covenants may still stand in the way. With limited exceptions—notably, in Houston—governmental regulations and restrictive covenants operate independently of one another. Covenants are private agreements undertaken by landowners while zoning laws are legislated by local government. In the case of a conflict between such private agreements and government regulations, the more restrictive provision will generally control.

The result is that even if a particular tract of land is zoned for commercial use, such use is impermissible if deed restrictions limit the property to residential use. Similarly, a private covenant might require a ten foot setback for any buildings on the property, but if local ordinances require a twenty foot setback, the ordinance must be followed. Consequently, a prudent buyer needs to undertake thorough due diligence on a property to understand the impact of both the law and any applicable restrictive covenants.

Whether you are signing a lease or purchasing property for commercial use, it is important to first gain a clear and accurate understanding of what restrictions and obligations are tied to the property you are considering, and second, the consequences if you do not or cannot comply with those restrictions and obligations.

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