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Use of Restrictive Covenants on Bank Branches Limits Community Choices

Use of Restrictive Covenants on Bank Branches Limits Community Choices

September 23, 2026

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Diane Standaert

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In its work to expand access to financial services across the Deep South, HOPE partners with many small towns to facilitate financial service access and community development. One challenge HOPE has encountered in this work is the use of restrictive covenants on former bank branch properties that prohibit the buildings from being used to provide financial services in the future.

 

The Hope Policy Institute has learned of the use of these covenants both in the context of private sales and from stories shared by rural community leaders in other parts of the country. Restrictive covenants on closed bank branches hinder communities’ ability to attract new banking services. This blog provides an initial introduction to restrictive covenants in the banking sector, highlights key state and federal policy developments, and underscores the importance of communities’ ability to have greater choices in meeting their banking needs.

 

What is a Restrictive Covenant?

 

A restrictive covenant, or an exclusive use clause, is a provision in a private contract for the sale of real estate that places certain conditions on the terms of that sale. In the housing context, restrictive covenants were used to prevent the sale of homes to Black homebuyers until such provisions were struck down as unconstitutional by the Supreme Court.1 In the commercial retail context, for example, restrictive covenants are commonly found in the grocery store segment, such that if one grocery chain closes or leaves its physical location, a different grocer would not be able to purchase or lease it.2 Research indicates that grocery chains may use restrictive covenants to prevent competitors from occupying former store locations, potentially steering customers toward the grocer’s remaining stores farther away. These restrictions can also limit access to replacement grocery stores and increase a community’s risk of becoming a food desert.3

 

Restrictive Covenants in the Banking Context

 

In a similar vein, a restrictive covenant, or an exclusive use clause, in the banking context is a clause that is imposed on the private sale or leasing of the bank branch to prevent the building from being used by another financial services provider in the future. These covenants prevent the building from being used for financial services purposes for a set duration of time, ranging from one to five years depending on the transaction.

 

The use of a restrictive covenant when the last bank in town closes its last branch may be particularly challenging. For small towns facing a range of hurdles in recruiting a bank or credit union to their community, the inability for a new institution to use a ready-made bank building – and likely the only such building in town – may serve as a prohibitive factor in deciding to open a branch there. The use of such covenants also stifles innovation that small towns must often rely on to bring services to places that have experienced population loss. For example a partnership between a nonprofit service or health care provider and a community banking partner in a shared space, or the placement of an ATM for continued cash access, would be prohibited by the restrictions.

 

In another recent analysis, HOPE highlighted how state laws across its six-state footprint limit local governments from using credit unions to serve as their banking partner, even when the credit union is the only branch in town.  As such, some communities may be facing the double burden of a closed bank branch with restrictive covenants while also being required to use only banks to hold their funds, making it more difficult for local leaders to recruit other financial institutions to come to the community.

 

There is currently no known available empirical data about the prevalence of restrictive covenants across the banking sector. Given the barriers the clauses present for communities to recruit new banking services, it is possible the use of these clauses contribute to the risk of increasing banking deserts in the Deep South and elsewhere.   

 

Examples of State and Federal Policy Related to Restrictive Covenants and Bank Branches

 

There are two examples of where restrictive covenants have been addressed through state and federal banking policy tools. First, the Massachusetts Division of Banking issued regulations in 1992 prohibiting the use of restrictive use clauses for state-chartered banks and credit unions as “a matter of serious concern…because such arrangements may hinder competition, and do not serve the public interest by providing convenience and advantage to bank or credit union customers.”4  Second, in 2024, the FDIC Board of Directors updated their Bank Merger Policy Statement to state that as part of the approval a bank merger application, the FDIC may request the release of restrictive use clauses on branches proposed to be closed within three years of the merger.5  The FDIC rescinded this policy on March 3, 2025.6

 

Restrictive use clauses in other retail contexts, such as supermarkets, have garnered attention as potential anti-competitive practices, perhaps in violation of anti-trust laws.7 And, in 2026, both Washington and Rhode Island enacted legislation limiting the use of restrictive covenants for grocery stores.8 As such, there may be increasing attention to the use of use of restrictive covenants in a range of contexts.

 

Increasing Communities’ Choices to Meet their Banking Needs

 

Even though there is no known empirical data on the scope of use of restrictive covenants in bank branches, the effects in small rural towns that encounter them are palpable. The release or prohibition of restrictive covenants on bank buildings would allow communities to maximize the use of their real estate assets to help bring the services and economic development they are seeking.  HOPE will continue to dig deeper into the use of restrictive covenants, both on their impact in Deep South communities and exploring options to expand communities’ choices for their place-based banking needs.

Footnotes

  1. Shelley v. Kraemer, 334 U.S. 1 (1948) ↩︎
  2. See, e.g., Christopher Leslie, “Anti-Grocery Covenants,” in Conference Compendium, “Reforming America’s Food Retail Markets,” co-sponsored by Yale School of Management, Information Society Project at Yale Law School, and the Yale Sustainable Food Program, Mar. 2022, https://som.yale.edu/sites/default/files/2023-05/grocery-compendium_may2023.pdf. ↩︎
  3. Id. ↩︎
  4. Mass. Div. of Banks, Regulatory Bulletin, 2.2-103 Exclusive Leases and Other Restrictive Agreements, available at https://www.mass.gov/regulatory-bulletin/22-103-exclusive-leases-and-other-restrictive-agreements (last revised Oct. 2012). ↩︎
  5. FDIC, Final Statement of Policy on Bank Merger Transactions, 89 Fed. Reg. 79125 (Sept. 27, 2024). ↩︎
  6. FDIC, Press Release, “FDIC Board of Directors Approves Proposal to Rescind 2024 Bank Merger Policy Statement,” Mar. 3, 2025, https://www.fdic.gov/news/press-releases/2025/fdic-board-directors-approves-proposal-rescind-2024-bank-merger-policy. ↩︎
  7. See, e.g., Christopher Leslie, “Anti-Grocery Covenants,” in Conference Compendium, “Reforming America’s Food Retail Markets,” co-sponsored by Yale School of Management, Information Society Project at Yale Law School, and the Yale Sustainable Food Program, Mar. 2022, https://som.yale.edu/sites/default/files/2023-05/grocery-compendium_may2023.pdf. ↩︎
  8. Washington, HB 2294, eff. June 11, 2026, available at https://lawfilesext.leg.wa.gov/biennium/2025-26/Pdf/Bills/Session%20Laws/House/2294.SL.pdf (applies to grocery stores and retail pharmacies), and Rhode Island, SB 2644, available at https://webserver.rilegislature.gov/BillText/BillText26/SenateText26/S2644.pdf ↩︎
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