Are Confidentiality Agreements or Other Restrictive Covenants Enforceable in Florida Real Estate Transactions?
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It is a common question whether certain restrictive covenants, such as confidentiality agreements, are enforceable in Florida. A restrictive covenant is a contractual agreement or provision designed to protect a party’s business interests and restricts what a party is allowed to do after the agreement is executed. See Proudfoot Consulting Co. v. Gordon, 576 F.3d 1223 (11th Cir. 2009). A restrictive covenant can take the form of a confidentiality agreement — where two or more parties agree certain information passed between them will remain confidential. See Rauch, Weaver, Norfleet, Kurtz &Co., Inc. v. AJP Pine Island Warehouses, Inc., 313 So.3d 625 (Fla. 4th DCA 2021). These types of provisions are found in many types of contracts, including real estate contracts.
When a party alleges a breach of contract, arising from the violation of a restrictive covenant, Florida courts look to section 542.335 of the Florida Statutes to determine its enforceability. The party seeking to enforce the restrictive covenant bears the burden of proof and must “establish by a preponderance of the evidence each element of his cause of action.” Sharp v. Long, 283 So.2d 567, 568 (Fla. 4th DCA 1973). When pursuing a claim for a breach of contract, the plaintiff must establish three elements: “(1) a valid contract; (2) a material breach; and (3) damages.” Friedman v. New York Life Ins. Co., 985 So.2d 56, 58 (Fla. 4th DCA 2008).
A recent Florida appellate court decision in Rauch., 313 So.3d 625, sets forth the boundaries of enforceability for restrictive covenants, specifically confidentiality agreements, in real estate transactions and brokerage agreements. This post will provide an overview of Florida law on restrictive covenants and the impact of the Rauch decision.
Florida’s Restrictive Covenant Law
Section 542.335, Florida Statues sets forth the guidelines Florida courts use when analyzing the validity of restrictive covenants. For a restrictive covenant to be enforceable in Florida, three requirements must be met:
- the restrictive covenant must be set forth in a writing signed by the person against whom enforcement is sought;
- the party seeking to enforce the restrictive covenant must plead and prove the existence of one or more legitimate business interests justifying the restrictive covenant; and
- the party seeking to enforce the restrictive covenant must plead and prove that the contractually specified restraint is reasonably necessary to protect the legitimate business interest or interests justifying the restriction.
Court’s Analysis of the Rauch Confidentiality Agreement
In Rauch, the original listing broker of a property required a prospective buyer to sign a confidentiality agreement between the prospective buyer and the broker. The prospective buyer did not purchase the property at that time, however, nearly a year after the broker’s listing agreement with the seller expired, and the property was listed with another broker, this same prospective buyer purchased the property. The original broker sued both the seller and purchaser of the property, alleging breach of the confidentiality agreement against the purchaser.
The trial court found the confidentiality agreement to be a restrictive covenant, governed by section 542.335, Fla. Stat. Additionally, the court found the purchaser did not breach the confidentiality agreement because she did not disclose any confidential information. Id. at 628. Furthermore, the trial court found that the confidentiality agreement was “indefinite in time which would otherwise render the restriction void,” however the court had the authority, under section 542.3335(1)(c), to construe the provision more narrowly to protect the broker’s legitimate business interests. The court used this authority to determine that a reasonable time limit would have been the length of the listing agreement. Using this time frame, the court found no violation of the confidentiality agreement occurred. Id. at 629.
The appellate court held the trial court properly relied on section 542.335 in its decision. Additionally, the appellate court held that the original broker failed to meet its initial burden of proof that the restriction was reasonably necessary. Lastly, the Court held that these statutory requirements for restrictive covenants are essential elements, not affirmative defenses.
Impact of the Rauch Decision on Confidentiality Agreements and Other Restrictive Covenants
The holding in the Rauch sets forth several important guidelines that must be considered when attempting to use restrictive covenants, especially in real estate transactions. While this decision does not prevent the use of confidentiality agreements and other restrictive covenants in real estate transactions, it does limit their use. Rauch establishes that the statutory requirements are essential elements of a claim for breach of the covenant. Meaning it is critical there be a legitimate interest behind the covenant, the reasonable necessity of the provision, and that it is signed by the other party.
Importantly, the party seeking to have the restrictive covenant upheld or enforced is responsible for pleading and proving these elements. Additionally, Florida courts will look to construe these restrictive covenants to be the least restrictive as possible. For example, as was the case in Rauch. limiting the length of a confidentiality agreement associated with the sale of real estate to the length of the selling broker’s listing agreement on the property.
The holding in Rauch emphasizes the need to consult an experienced attorney when looking to incorporate a confidentiality agreement or other restrictive covenant into a transaction to ensure that the covenant remains within the guidelines of section 542.335 and the holding in Rauch.
- James O. Birr, III
- Maxwell Salain, JD Candidate