When most people think about contracts, they imagine an agreement between two parties in which one agrees to provide a service or product to the other in exchange for compensation. While this does describe the terms of many contracts, it’s important to note that legal agreements can also specifically be used to restrict individuals from doing certain things. This is achieved through the use of a restrictive covenant, which is essentially an agreement barring someone from engaging in certain activities. For instance, many businesses use restrictive covenants in their employment contracts to keep their employees from using sensitive company information in certain ways.
Restrictive Covenants in Business
Restrictive covenants are used most often in employment contracts to prohibit employees from engaging in certain activities either while employed, or for a specific period of time after their employment ends. These agreements usually fall under one of three categories:
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- Non-compete agreements, which restrict the activities of a former employee who agrees not to compete with the former employer for a specific period of time and in a certain geographical area, after the employment relationship ends, for any reason;
- Non-disclosure agreements, which restrict an employee from disclosing business secrets, proprietary processes, trade secrets, or other business-related information, during the employment relationship or after it ends; and
- Non-solicitation agreements, which restrict one party from soliciting the employees or customers of the other.
The details of these covenants vary depending on the type of contract in question. Non-compete and non-disclosure agreements, for instance, are commonly found in the contracts of employees whom a business has invested heavily in by offering that person extensive training or issuing a signing bonus. These covenants entrust employees with confidential information, but also protect the company from having that information disclosed to other companies if that employee leaves.
Restrictive covenants are also integral to other types of business relationships. Partnership agreements and distribution agreements, for instance, often utilize non-compete and non-solicitation clauses. Alternatively, the new owner of a business may require the former owner to sign a non-compete agreement as a part of the sale of the company. Similarly, a new business owner may also want to restrict a seller’s ability to take employees with him or her or to solicit existing clients.
Restrictive Covenants in Real Estate
Restrictive covenants are also often used in a real estate context. Referred to as deed restrictions in these cases, restrictive covenants limit how a party can use a property. Restrictive covenants are, for example, common in condominiums and limited-access housing situations where all of the properties are the same or similar. These restrictions could include everything from banning home-based businesses and pets to restricting the way that a property can be renovated. Buyers who purchase property in a deed-restricted area must agree to those restrictions before the sale will be finalized. Violations of that agreement can result in fines and even lawsuits.
Consult with a Business Lawyer Manhattan
While many restrictive covenants are perfectly legal, courts do regularly invalidate agreements that are deemed too restrictive, so if you have questions about the scope of your own contract’s terms, you should speak with an experienced business attorney in Manhattan who can advise you.