what is a restrictive covenant 
a restrictive covenant is a condition that restricts limits prohibits or prevents the actions of someone named in an enforceable agreement in bond obligations restrictive covenants limit the amount issuers can pay in dividends to investors restrictive covenants are common in real estate deeds and leases where they restrict how owners and tenants can use a property it s important to differentiate between the two main types of covenants negative and positive negative covenants are actions you can t take while positive covenants are actions you must take for example a negative covenant in real estate could prevent you from raising chickens on your property on the other hand a positive covenant could require you to mow your lawn loan documents might have a negative pledge clause banning the borrower from using a given asset to secure other loans understanding restrictive covenantsas the name implies a restrictive covenant is an agreement that restricts one of the parties in a contract from taking specific actions for example a restrictive covenant may limit how much public companies pay their shareholders in dividends it may also place a cap on executive salaries failure to abide by restrictive covenants can result in fines and other penalties including legal action restrictive covenants are commonly used to prevent a bond issuer from issuing more debt until one or more series of bonds mature the issuer may also be restricted from paying dividends above a certain amount to shareholders this restriction minimizes bondholders default risk because when more money is paid to shareholders less money is available to meet payment obligations to lenders the more negative covenants a bond issue has the lower the interest rate will be on the debt restrictive covenants make the bonds safer in the eyes of investors 