Daily Development for Wednesday March 22, 1995

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

Items in the Daily Development section generally are extracted from the Quarterly Report onDevelopments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexedandbound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published bytheABA Press. The Annual Survey volumes are available for sale to the public. Contact Shawn Kaminsky at the ABA. (312) 9885260. Readers are urged to respond, comment, and argue with the daily development or the editor'scomments about it.

SERVITUDES; RESTRICTIVE COVENANTS; USE RESTRICTIONS; ENFORCEMENT: A restrictive covenant prohibiting the use of an inner city property as a supermarket may be unenforceable if it is unreasonable and contrary to the public interest. Davidson Bros., Inc. v. Katz &Sons, Inc., 643 A.2d 642 (N.J.Super.App.Div. 1994). The seller of the property had operated a supermarket on it previously, but had closed it. It sold the property subject to a deed restriction prohibiting the use of the premises as a supermarket or grocery store for a period of forty years fromthe date of the deed. Later the local Housing Authority bought the property and leased it for $1 per year to another grocery store company on the condition that it invest in the operation of a grocery story at the site. The covenantee objected to the breach of the covenant.Originally, the contest focussed on whether the covenant "touched and concerned" the land so as to run to subsequent owners. But the New Jersy Supreme Court, taking a developing modern view embodied in the drafting of the new Restatement on Servitudes, held that traditional "touch and concern "requirements are no longer relevant, and instead listed a number of substitute considerations that itdeemed appropriate for a court to evaluate in determining whether a land covenant was valid. But, going beyond anything contemplated currently in the Restatement, the Supreme Court held that the court's view of appropriate public policy should be a controlling factor in determining whether covenants should be enforced. It remanded to the trial court for considerations consistent with thatview.

The trial court, unsurprisingly, took evidence sufficient to support the view that the covenant was undesirable, and struck it down. This appeal to the intermediate appeals court resulted.

T he court here noted that anti-competitive covenants are disfavored, but elected not to base its decision on the anti-competitive nature of this covenant. Instead, it held that courts can hold a covenant invalid whenever it is inconsistent with public policy. Pointing to public policy considerations, the court paid considerable deference to the testimony of the city's Director of Policy, Planning and EconomicDevelopment, which supported the conclusion that the store was peculiarly suited for supermarket use: there were no economically viable substitute locations, the lack of a supermarket in the area made it a less hospitable and desirable place, resulted in scarcity and higher prices in a low income cityneighborhood, was inconvenient, and had a negative impact on the diet and health of the inner citypopulation. Furthermore, the absence of a supermarket was seen as a factor contributing to inner citydecay, since a supermarket is a retail anchor that attracts other retail operations. Stating that urban rehabilitation is imbedded in public policy and the public interest, and that these considerations were not fostered by enforceability of the covenant at issue, the court declared it unreasonable and unenforceable.

Comment: From the standpoint of this editor, there are so many troublesome issues about this case that it is difficult to know where to start. Consider, for instance, the issue of the court making broad evaluations of public land use policy in thecontext of an individual suit brought by individual litigants. Our legal system has entrusted that discretionary function largely to more politically sensitive bodies who have greater access to a wide range of facts and expertise that litigants in particular issues would not necessarily be able or willing to bring before a court .Next. consider the implications for predictability of bargaining result when court begin undoing commercial, bargained for, protective covenants on broad-based grounds of public utility. The valueof such covenants as a bargaining element in real estate transactions drops dramatically - regardless of the content. It is, of course, impossible to predict what some court somewhere might find offensive to public policy. Surely, for example, a commercial covenant against use of a property as a shopping center would not be the first type of provision to spring to mind when one begins cataloguing servitude requirements offensive to public policy. We are left with more uncertainty and less flexibility in allocating interests in land, and less ability to rely upon the private exchange system to make resource allocation choices. This inevitably increases at least the initial cost of the process of resource allocation. Whether it is in the long run better depends, one supposes, on the ability of trial courts to function as "philosopher kings" on land use matters. (The process by which judges are selected certainly does little to give one confidence that they are the best deciders of land use matters - not to mention the limitations of the forum discussed above.)

In sum, this is an absolutely terrifying decision for real estate lawyers and should be the focus of special attention. It comes on the heels of a turnaround on the same issue by the California SupremeCourt, which reversed a number of decisions that had reduced disputes over covenants to simple public policy contests. See Nahrstedt v. Lakeside Village Condo., 33 Cal. Rptr. 2d 63 (Cal. 1994) (condominium declaration provision limiting house pets is enforceable). In this case, we are dealing with a commercial covenant that is of a sort that is central to the success of many modern shopping centers. Is there a basis in tradition or sound policy for a court simply to impose its own view of desirable land use, rather than to permit the market to operate? Nothing prevents a public agency from condemning the restriction when it deems an alternative land use to be in the public interest, but for the court to do so here seems to be an unbridled breach of good sense, and possibly Due Process.

Question for Dirt readers: Do we in fact have a taking here? In other words, is the covenant itself a separate valuable property interest that has been totally removed from its owner?

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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